Staying invested through volatility

GLOBAL markets are once again confronting the reality that uncertainty is never far away. Recent geopolitical tensions in the Middle East, coupled with concerns around global energy supply routes, have caused renewed volatility across financial markets.

While such developments often dominate headlines, geopolitical tensions are not unusual in the broader history of financial markets.

Over the past several decades, investors have navigated oil shocks, financial crises, pandemics and geopolitical conflicts. Despite these disruptions, markets have continued to generate long-term growth for disciplined investors.

This underscores a key principle of investing: portfolios should be constructed for resilience, not reaction. Rather than attempting to predict every geopolitical development, investors would be better served by building diversified portfolios designed to withstand periods of uncertainty while remaining positioned for long-term opportunities.

In practice, this means anchoring portfolios in fundamentally strong companies, maintaining allocations to investment-grade bonds and incorporating diversifiers that can help cushion periods of market stress.

Market reactions to geopolitical events often temporary

Geopolitical events can trigger swift market reactions. Oil prices may spike, equity markets may retreat temporarily and volatility indicators often rise sharply in the immediate aftermath of major developments.

Studies on geopolitical shocks over the past several decades indicate that equity market drawdowns linked to such events are usually relatively brief, with markets stabilising once the initial uncertainty subsides.

Unless geopolitical tensions escalate into sustained economic disruption – such as a prolonged energy supply shock or a global recession – markets tend to regain stability once uncertainty fades.

For investors, this reinforces the importance of maintaining discipline rather than reacting to short-term market movements. Attempting to time geopolitical developments has historically proven difficult, and frequent adjustments during volatile periods can undermine long-term returns.

In the current environment, one of the key channels through which tensions can affect markets is energy prices.

Energy shocks and US market resilience

Conflict in the Middle East has drawn attention to global energy markets. Any sustained disruption to major oil shipment routes often leads to higher energy prices and renewed inflationary pressures across the global economy.

However, the economic impact of energy shocks today differs from previous decades. Structural changes in global energy production – particularly the significant increase in US oil production over the past decade – have reshaped the dynamics of oil price spikes.

According to the US Energy Information Administration, the US became the world’s largest oil producer in 2018, significantly reducing its dependence on imported energy.

This transformation has reduced the vulnerability of the US economy to external energy supply disruptions. As a result, US financial markets have historically demonstrated resilience during periods of geopolitical stress.

Supported by deep and liquid capital markets, strong corporate profitability and a structural advantage in sector composition, we believe US equities continue to serve as a foundational anchor in globally diversified portfolios.

Equities the foundation for long-term growth

Periods of heightened volatility often highlight the difference between companies with durable earnings and those more dependent on favourable economic conditions.

Businesses with strong balance sheets, stable margins and consistent cash flows are generally better positioned to navigate uncertain environments. Their financial strength allows them to invest, innovate and return capital to shareholders even when conditions become challenging.

These characteristics often translate into more durable earnings growth and stronger long-term compounding of shareholder value.

Importantly, companies with resilient fundamentals are not limited to traditionally defensive sectors. Many of today’s most innovative and fastest-growing firms also demonstrate the balance-sheet strength and durable earnings that help to define resilience in modern equity markets.

While a focus on such companies does not eliminate market risk, it can strengthen a portfolio’s ability to withstand volatility while maintaining exposure to long-term growth opportunities.

High-quality bonds as stabilisers

While equities remain the primary driver of long-term growth, fixed income plays an equally important role in building resilient portfolios.

Investment-grade bonds can provide both income and stability during periods of market stress. The current interest-rate environment has also restored bonds as a meaningful source of income.

After more than a decade of exceptionally low yields following the global financial crisis, fixed income now offers more attractive income potential while continuing to serve as a stabilising anchor within diversified portfolios.

Maintaining exposure to investment-grade bonds with intermediate duration can potentially help to balance income generation with manageable interest-rate sensitivity.

Diversifying beyond traditional assets

Diversification with assets that behave differently during periods of stress remains one of the most effective ways to manage uncertainty.

Gold, in our view, remains an important portfolio diversifier. It may provide a source of uncorrelated returns and act as portfolio hedge, supported by sustained demand from central banks and global asset allocators.

Eligible investors are also increasingly incorporating alternative strategies, including long-short equity and multi-strategy hedge funds, into diversified portfolios.

While these strategies may involve lower liquidity and additional risks, the ability to take both long and short positions across markets may allow investors to seek returns across different market environments and help manage overall portfolio volatility.

Combined with diversified allocations across equities and fixed income, these alternative strategies can help suitable and qualified investors build portfolios which could be better equipped to navigate uncertain market conditions.

Staying invested

Uncertainty is not an anomaly in financial markets; it is a constant. Rather than attempting to predict every geopolitical development, investors are better served when they focus on the structural strength of their portfolios.

Resilient portfolios – built on companies with durable earnings, supported by investment-grade bonds and potentially complemented by diversifiers such as gold and alternative strategies – will help investors navigate short-term volatility while remaining positioned for long-term financial goals.

The writer is head of investment advisory for Asia South Wealth at Citi