How a geopolitical risk premium could help shield investors from today’s conflicts

Do investment houses have the ability to protect their clients from geopolitical shocks?

The spiralling military conflict between Israel and Iran, which the US is threatening to enter, is putting the spotlight on investment managers. Clients are starting to ask: do our managers have the bandwidth to protect investors from the relatively new phenomenon of geopolitical risk?

Many commentators think not. “All the focus at present is on the ongoing war between Israel and Iran, but this just reminds us of the importance of geopolitics and its ability to impact on markets and the global economy,” writes Timothy Ash, associate fellow at Chatham House and a senior sovereign strategist at RBC BlueBay Asset Management in London.

“For example, if we see regional energy sector assets subject to attack, the closing of the Strait of Hormuz could see a repeat of events in the 1970s, with potential for an oil price shock to the global economy.”

The belief from Mr Ash and other critics of investment houses is that financial players were largely unprepared for Russia’s full-scale invasion of Ukraine in 2022, resulting in major market moves, inflation shocks, higher central bank policy rates in response and a hit to global growth.

Geopolitics, he believes, is a multidisciplinary subject, requiring expertise in foreign affairs, domestic decision making, environmental issues, defence and security, geography, economics, trade, markets and, increasingly, artificial intelligence. “There are many moving parts and few people have all the tools to accurately call events,” he suggests.

There is often a collective move to be over-optimistic, says Mr Ash, but also a mistaken belief that all players share the same information. Beat Wittmann, Zurich-based chairman and founder of Porta Advisors, which runs money for several wealthy European families, goes further, suggesting there is groupthink among private banks and investment houses, impacted by a very negative “collusion” of business interests.

Braver calls

But something appears to be changing in the ecosystem, with wealth managers feeling braver about making independent investment calls related to geopolitics. Some have even started talking about a “geopolitical risk premium” being applied to markets, as they increasingly fear a potentially devastating escalation, with far-reaching macroeconomic and market implications.

There is now a clear concern among market analysts that the conflict could widen, and fast. “Markets have remained surprisingly steady in recent weeks, even as tensions have escalated. But if the US joins militarily, that calm will break,” says Nigel Green, CEO of deVere Group.

He warns that investor positioning largely remains optimistic, geared for rate cuts and stable energy prices. A sudden shift, especially involving key infrastructure or shipping routes, could trigger a violent repricing across all major asset classes. Oil has already risen nearly 9 per cent since Israel’s initial strikes, but further disruption could send it much higher. “The world economy is not prepared for another energy shock,” Mr Green says. “A spike would reset inflation expectations and likely delay or reverse central bank easing, a double blow for equity markets priced for perfection.”

Though defensive positioning is starting to show, with the US dollar having firmed and Treasury yields dipping, Mr Green believes this could accelerate. “If a US strike happens outside trading hours, liquidity gaps will widen and volatility will surge,” he warns. High-beta names, tech stocks, emerging markets and risk-sensitive currencies could be hardest hit in the first wave. He also sees a worrying disconnect: “Despite the headlines, investor allocations to risk remain high. If a broader war breaks out, the reaction won’t be gradual, it will be fast and indiscriminate.”

“Geopolitical shocks are unpredictable, but their impact can be mitigated with the right asset allocation and risk management. Be one step ahead, not caught off guard” — Nigel Green, deVere Group

Mitigating impact

Mr Green encourages investors to prepare, not panic. “Geopolitical shocks are unpredictable, but their impact can be mitigated with the right asset allocation and risk management. Be one step ahead, not caught off guard.”

At RBC BlueBay, Mr Ash seems to fear for the worst. Although prominent Republican figures are pleading with the US president to stick with the Maga mantra of “no more foreign adventures,” the fear is that Mr Trump will fall for Israeli prime minister Benjamin Netanyahu’s pitch that he can help him secure his place in history. “By providing a limited military intervention, with limited risks given the Islamic Republic is on its last legs, Trump can save the world from Iran’s nuclear threat and free Iran of a brutal regime,” says Mr Ash, interpreting Israeli dialogue with the US.

The temptation might prove too strong for Mr Trump to avoid, bearing in mind his peace efforts in both Gaza and Ukraine are failing and that his foreign policy initiatives are now being labelled with the disparaging acronym of Taco – ‘Trump Always Chickens Out.’

The worst-case “full energy shock” would see Iran attempt to halt oil flows through the Strait of Hormuz, triggering a global slowdown and political backlash

François Savary, founder of Geneva-based Genvil Wealth Management, also warns that a serious disruption would require a rethink of the improving inflation narrative. “The risk of a global recession would increase and markets would react more sharply than they have so far,” he suggests.

Leading private banks, however, prefer to offer a range of scenarios rather than bolder calls. At Bank Syz in Geneva, chief economist Reto Cueni outlines three possible scenarios. In the mildest, Iran engages in short-term signalling with limited disruption. A more serious path involves protracted tension used as diplomatic leverage, driving persistently higher energy prices and slower growth. The worst-case “full energy shock” would see Iran attempt to halt oil flows through the Strait of Hormuz — a chokepoint for 20 per cent of global oil and LNG — triggering a global slowdown and political backlash, especially from major importers such as China.

“We use energy exposure largely as a hedge for tail risks,” says Mr Cueni, though emerging market exposure may need recalibration. He also sees longer-term implications: “A fossil fuel price spike strengthens the case for renewables. Strategic capital will eventually follow, but any shift will take time.”

At Amundi, Europe’s largest investment house managing more than €2.2tn in assets, a more measured stance comes from Lorenzo Portelli, head of cross asset research at Amundi Investment Institute in Paris. “In the short term, oil prices above $70 reflect uncertainty and partial blockages,” he says. “To reach $100, you’d need a significant disruption, around 10 million barrels per day offline. Without permanent damage, prices should normalise to our $60–70 medium-term target.”

Amundi has maintained exposure to commodities to hedge against geopolitical risk and expects investor interest in real assets, inflation hedges and the energy transition to persist. Mr Portelli adds that markets are factoring in higher uncertainty, but not yet a scenario of full-blown stagflation. In that case, equity hedges, commodities and gold would become more central to portfolios.

Adjusting positions

Smaller firms appear keener to adjust their positions. Kirill Pyshkin, chief investment officer at Welrex, notes that while oil’s long-term upside is limited, energy equities still offer yield and resilience. “We prefer infrastructure-linked real assets, especially in German defence and logistics. That theme has outperformed this year,” he says. Gold and digital assets remain in the mix as geopolitical diversifiers.

While speculation has swirled about a full maritime blockade, many claim the risk is overstated. “Even during the 1980s tanker war, oil kept moving,” says Ahmed Mehdi, managing director of Renaissance Energy Advisors and senior fellow at the Oxford Institute for Energy Studies. “A closure of Hormuz would hurt Iran more than anyone; it would choke their own exports and prompt a US military response, potentially even pressure from China, which buys more than 70 per cent of their crude.”

The recent oil rally, he says, was driven by risk premiums rather than supply shocks. Kharg Island, which handles more than 90 per cent of Iran’s crude, remains operational. Still, he notes that infrastructure attacks, like a potential hit to the Persian Gulf Star condensate splitter refinery unit, could destabilise Iran domestically and affect output from the South Pars natural gas field in the Persian Gulf.

That said, he sees sufficient buffers: “Saudi Arabia and the UAE have spare capacity. And with seasonal demand peaking, market balances should loosen. If there’s disruption, physical crude premiums will rise, but the fundamentals remain intact.”

Shipping, often a bellwether for geopolitical tension, has already felt the jolt. Tony Foster, chief executive officer of Marine Capital, says freight rates have surged. “War, sadly, is often good for shipping,” he notes. A VLCC tanker transporting $150m worth of crude might see daily rates rise by $20,000 — a marginal cost for buyers, but a windfall for shipowners,” he says. The sentiment was echoed by Clarksons, the world’s largest shipbroker: “When shots are fired, buy ships.”

While Israel and Iran have been at loggerheads for a decades, with Israel repeatedly warning against Tehran’s nuclear ambitions, today’s showdown differs from previous ones, say senior figures.

“This is not a crisis like those seen in the past,” says Kim Cornwall, a former high-ranking Merrill Lynch and SG Hambros private banker who now advises wealth managers. “Iran is weak, humiliated and isolated. It was already in domestic turmoil before these events.” He argues that a drawn-out air campaign is unlikely, as both sides face munitions constraints, but Israel has resupply from the US, whereas Iran is more limited. Most critically, he says, any Iranian move to block Hormuz would almost certainly draw a direct US response, a step Tehran appears reluctant to take.

The main difference for wealth managers, believes Mr Cornwall, is that investment bosses have finally realised their ability — or inability — to predict geopolitical risks will be remembered by key clients. “CIOs and investment committees across private banks are clearly weighing the risks and opportunities these events present.”