Step 1: Diversify
Under normal circumstances, spreading your bets across different industries and stocks is a good way to sail through market cycles. However, the need for diversification intensifies when war breaks out. Geopolitical risks add a new layer of risk that your portfolio may not have accounted for.
While most investors think of diversification in terms of different companies, it’s also important to diversify across a variety of asset classes, industries and geographies.
Most investors tend to focus on domestic businesses that they’re familiar with, leaving them overexposed to a single region in just two or three industries. Diversifying beyond your borders is a good idea.
The Ukraine crisis has heightened global risk. That makes it even more important to diversify intelligently.
Perhaps the best way to diversify is to add exposure to an asset class that has served as a safe haven in previous wars: commodities.
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Step 2: Hedge with commodities
Essential commodities play a vital role in the current conflict.
Russia is the second-largest oil exporter in the world and has the eighth-largest reserves. By volume, it’s the largest exporter of natural gas on the planet. Meanwhile, Ukraine is considered the breadbasket of the region — it’s the world’s fifth-largest exporter of wheat. In fact, the yellow in Ukraine’s flag signifies wheat fields.
Food and energy could be bargaining chips in the conflict. Canada has already banned Russian crude oil imports while the ongoing bombardment is restricting Ukraine’s production and export of wheat.
These commodities have seen a sharp rise in their market value: Crude oil is up 20% over just the past week and wheat has soared to 14-year highs.
If the war extends for months or years, investors could face a commodities supercycle.
Exposure to commodity producers might be a good idea. An ETF that tracks this segment, such as the BlackRock iShares S&P/TSX Capped Energy Index ETF, should be on your radar.
Step 3: Follow king dollar
Historically, the U.S. dollar has been a relatively reliable safe haven during times of global conflict and economic stress. In fact, much of Russia’s reserves and nearly half of its trade is conducted in USD, which is now subject to sanctions.
The USD Index rose from 96 to 97.4 since the invasion began, suggesting that assets denominated in the greenback are more likely to retain their value if the tension escalates.
One way to get exposure to this robust currency is to bet on America’s blue-chip stocks like Apple, Wal-Mart and Johnson & Johnson.
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Step 4: Bet on global growth
The U.S. stock market is holding up decently well despite the crisis, with both the S&P 500 and Dow Jones Industrial Average down about 1% over the past week.
The market seems to be indicating that America’s growth engine is relatively insulated from the Russia-Ukraine war. But surprisingly, European growth stocks aren’t exactly being battered, either.
UBS recommends betting on growth stocks in other parts of the world despite the conflict.
"[D]espite their proximity to the crisis in Ukraine,” UBS writes, “the continued outperformance of Eurozone equities compared to US equities over the past month shows that the forces of economic recovery remain powerful and are potentially still a more important driver of global markets than events in Eastern Europe.”
Step 5: Build a defensive base
UBS’s top recommendation for building a defensive base is to gain exposure to the rock-solid health care sector.
Despite high operational costs, health care businesses and specialized real estate in this space have robust cash flows. These cash flows are relatively predictable and insulated from geopolitical tensions and economic cycles.
The health care industry’s resilience was exhibited during the pandemic of the past two years: The Health Care Select SPDR ETF — one of the largest broad health care funds by total assets — provided positive returns in both 2020 and 2021.
In addition to the strategies mentioned above, UBS suggested a few other techniques to play defense.
“We also see dividend strategies, dynamic allocation strategies, and the use of structured solutions as potentially attractive means of improving the risk-return profiles of overall portfolios.”
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