Crisis patterns

Investing lessons learned from previous geopolitical shocks

The Ukraine crisis has gripped markets over the past month and worsened recently. Measures of volatility have spiked to the highest level since the Delta variant shocked markets last fall¹. Those jitters have translated to U.S. equities in the red, Treasury yields across the curve down as investors flock to safety, and Brent crude oil surging to $100 per barrel for the first time since 2014 – the same year Russia annexed Crimea.²

Our overall BlackRock Geopolitical Risk Indicator³, refreshed in mid-February, has spiked to its highest level in more than a year amid heightened market attention to geopolitical competition. This is driven by elevated market attention to conflict-related risks across the board – most notably, Russia-NATO conflict.

With higher market volatility, what is the potential impact for investors? Some clues can be gained by looking at past geopolitical events. A key conclusion from our historical analysis⁴ of asset price reactions to 68 risk events since 1962 is that the impact of geopolitical shocks has historically tended to be more acute when the economic backdrop is weak, and thus as economic growth slows from its 2021 peak in the mid-cycle environment of 2022, geopolitical risk may amplify volatility more sharply, particularly as elevated inflation and the uncertain path of interest rates has deteriorated liquidity in most markets.

Our analysis of six past geopolitical shocks as displayed in the chart finds that U.S. Treasuries tended to perform positively over a three-month horizon, even outperforming U.S. equities in some cases, confirming their traditional ballast properties in a multi-asset portfolio. U.S. equities and a diversified basket of commodities also tended to see positive performance when measured over a three-month horizon, demonstrating the power of staying invested in strategic equity allocations through bouts of volatility and the tactical utility of commodities as a hedging, diversifying asset class.

The bottom line, in other words, is that many investors are smart to stay put and not attempt to time geopolitical events. However, for those who want to “de risk” or move into traditional safe havens like Treasuries or commodities to potentially build some portfolio resilience, the ETF provides a flexible vehicle to make those sorts of tactical moves. ETF trading volumes tend to rise with risks in the market, providing liquidity during periods of heightened volatility.

Gargi Pal Chaudhuri, Managing Director, is Head of iShares Investment Strategy Americas at BlackRock. Investment Strategists Arjun Kapur and Jon Angel contributed to this article.

Notes

1. Source: Bloomberg, Chicago Board Options Exchange Volatility Index (VIX), Nov. 1, 2021 – Feb 24, 2022.
2. Source: Bloomberg. Asset class performance measured by the following indices: U.S. equities is S&P 500 Index (SPX Index), from Jan. 1, 2022 to Feb 24, 2022. Treasury is Bloomberg US Treasury: 20+ Year Index (LT11TRUU index), from Jan. 1, 2022 to Feb 24, 2022. Brent crude oil is ICE Brent Futures April 22, 2022 contract (CO1 Cmdty) from Jan.1, 2014 to Feb 24, 2022.
3. Source: BlackRock Geopolitical risk dashboard
4. Source: Gauging geopolitics - A framework to assess and price geopolitical risks

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