Geopolitics and Investing: what matters and what doesn’t

The year has only just begun, yet 2026 is already setting an unusual tone with markets feeling slightly out of sync. Emerging markets are pushing to new highs, gold is drifting upwards again and political noise from Washington is never far from the surface, causing wide swings in commodities. 

The latest issue has to do with renewed tensions between the US and some European countries, with President Donald Trump threatening to impose an extra 10% tariff on imported goods from France, Germany, the UK, the Netherlands, Denmark, Norway, Sweden and Finland from 1 February, to rise to 25% from 1 June if no resolution on the dispute over Greenland is found. 

At the time of writing, the response from the European Union isn’t clear, other than a possible suspension of existing trade arrangements and a debate on the implementation of counter-measures. Similarly, it’s not clear whether Trump’s intentions are a negotiating tactic similar to the 100% tariff threat on China last year, which never materialised. The issue is further complicated by a possible ruling of the US Supreme Court, which could declare the tariffs incompatible with US law. That could trigger a short rally across equity and credit markets but also trigger the reimposition of tariffs via other means, cutting the rally short. 

We caution against overreacting to geopolitical headlines and recommend to stay invested and diversified across regions, with key risk mitigators in place. Statistical evidence supports this approach. For example, JPMorgan analysed more than 80 years of data, comparing equity returns after major geopolitical events to ‘quiet’ periods. They find that while markets may underperform over the very short-term (3-month), 6- and 12-month equity returns after a geopolitical shock are statistically indistinguishable from other periods, implying that geopolitical events often don’t matter for long-run returns (“How do geopolitical shocks impact markets? May 2024”). 

Similarly, Morgan Stanley looked at 23 major geopolitical events since 1950 and reported that geopolitical shocks were often followed by higher equity prices over 6-12 months, with only a minority of outcomes showing negative returns, and those were typically associated with commodity shocks such large oil price moves, which isn’t the case right now (“Why stocks can be resilient despite geopolitical risk, June 2025”). 

Of course, some events can temporarily cause market setbacks, but they’re often related to significant military escalations. Schroeders looked at major conflicts over the past 30 years. In each of these examples, equities initially fell as markets assessed risk, but typically recovered strongly within a few months (“Measuring the market impact of geopolitics, September 2019”). 

This finding is in line with recent evidence from the International Monetary Fund’s Global Financial Stability Report, which reviewed the market impact of geopolitical shocks, finding that stock prices generally show modest reactions on average, but large military conflicts or supply shocks (e.g., oil) can have more pronounced effects. The broad finding supports the view that most geopolitical events aren’t dominant drivers of aggregate returns (“Geopolitical risks: implications for asset prices and financial stability, April 2025”). 

The overarching theme here is that the world is fragmenting into different geopolitical blocs, something we’ve argued for a while. When you look back, the shift really began in 2016 with Brexit and Trump’s first presidency. From that point on, we moved towards a more geopolitically fragmented, multi-polar world, rather than one single globalised economy and market. This new world is characterised by more competition among major powers over resources and technology, rising regional tensions and more significant government intervention in the economy.  

The specific events we’ve witnessed over the past decade, and we’re likely to continue to see every now and then, are a manifestation of this underlying trend. Anticipating these events with the precision that would be needed to adjust portfolios ahead of time is, in our view, very difficult and, often, impossible. For us, planning beats prediction. And planning means a strategy of global diversification, such that a wobble in parts of the portfolio, e.g. Middle Eastern tensions impacting equities, might be mitigated or offset by a gain elsewhere, such as our gold and commodity exposures. This is why we continue to hold gold, broad commodities, and inflation-protected bonds as part of our long-term allocation. 

More recently, given the unfolding situation in Venezuela and renewed uncertainty around Greenland and Iran, we upgraded the quality of our fixed income exposure. We took profits on global investment grade bonds, where valuations are demanding, and bought safer US Treasuries and European government bonds, which are now more attractively valued than they were a few months ago. And, more tactically, given a good start to the year for markets, we’ve also extended our US equity warrant – paying a small premium for an ‘insurance’ instrument that appreciates when US equities fall (where client knowledge and experience, and investor guidelines and regulations, permit). 

We believe four forces will shape the market environment this year: 

1. trade tensions ease, especially when it comes to US-China rivalry, which has the potential to affect earnings growth much more than tariffs on some European countries; 
2. governments keep supporting growth via fiscal stimulus;
3. central banks cut interest rates; 
4. AI investment continues to support growth. 

That’s the backbone of our clearer skies outlook. Not perfectly clear skies, because geopolitics can cause volatility at times, which is why we stay diversified across geographies and asset classes.  

We’re currently positioned with an equity overweight but, recognising some of these risks, our overweight is moderate. We stay overweight emerging market equities because all four drivers work in their favour. When trade uncertainty fades, export-heavy economies breathe easier. China has stepped up support for the private sector and continues to lower interest rates, as it did last week. Its strategy is anchored in technology at a time when global supply chains still run through Asia. TSMC’s strong earnings last week reinforced the idea that the AI story isn’t running out of steam. 

We also stay overweight US equities for many of the same reasons. Fiscal support is still flowing through the economy and monetary policy will get friendlier. We also hold an equal-weighted index that has been outperforming early in the year as stimulus slowly feeds through and supports sectors such as financials and industrials. On top of that, we hedge our currency exposure, stripping out foreign-exchange effects, as we expect the dollar to stay soft. 

Finally, we’re overweight European equities as well. The region benefits from fiscal spending on defence and infrastructure, which should provide a steadier foundation for growth over time. We’re watching this position very closely: European markets, obviously, could see some volatility in the near term, especially if tariffs were to increase further; but, in line with the studies mentioned above, the medium-term impact is likely to be moderate or even wash out, and any resolution could boost asset prices across Europe. 

Attention now turns to Davos, the Swiss location where the World Economic Forum, a gathering of politicians, government officials, central bankers, business leaders and academics, takes place this week. Trump looks set to participate on Wednesday and Thursday to meet European leaders. 

The European institutions are weighing potential retaliation against the US, including up to €93bn in tariffs and possible use of the Anti-Coercion Instrument, which could restrict access to the EU market for US companies, including in services and Big Tech. These measures are prepared but not yet triggered, as most member states continue to prioritise dialogue over escalation.