Five assets classes to protect your portfolio

Conflicts between major countries increase the volatility of markets and lead to a fall in asset prices, including equities. Here are five asset classes that can cushion the blow to your portfolio from rising geopolitical tensions

Karan Deo Sharma
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Five assets classes to protect your portfolio

Five assets classes to protect your portfolio

For the first time in living memory, two wars are going on simultaneously – one in Eastern Europe and the other in West Asia. The recent missile attack by Iran on Israel in retaliation to the latter's attack on the former's consulate in Damascus has raised geopolitical tension in the region to its highest level in decades. Wars cause death and destruction and leave behind scars that can take decades to heal.

Conflicts between major countries are also destabilising the world economy and financial markets including India. In general, major wars increase the volatility of markets and lead to a fall in asset prices including equities.

For example, the benchmark Nifty 50 index is down nearly 3 percent since the break-out of tension between Iran and Israel. Given this, geo-political tensions are a major risk factor for investors and they need to hedge their portfolio from it.

Here are five asset classes that do relatively better during times of conflict and can be used to cushion the blow to your portfolio from growing market volatility.  

1. Oil & Energy Stocks

The crude oil prices are the first to react to a rise in geopolitical tension and the possibility of a break out of a war in West Asia. This is not a surprise given that West Asian countries such as Iran, Saudi Arabia, Iraq and Kuwait are the top producers and exporters of crude oil in the world. These countries' role in the global energy market has become even more important after Western countries put sanctions on Russian energy supplies. 

Not surprisingly the benchmark Brent crude oil prices are up 15 percent since the start of the 2024 calendar year. This is positive for oil & gas producers in India such as Oil & Natural Corporation (ONGC) and Oil India and Vedanta. 

ONGC has been one of the top performers in recent weeks and its stock price is up more than 10 percent in the last one month. Similarly, there has been a rally in Oil India and Vedanta.

2. Gold

The yellow metal is a safe haven asset and one of the first ports of call for investors in times of economic and political crisis. The precious metals are also a hedge against high inflation and currency volatility in emerging economies such as India. The yellow metal has proved its worth; its price is up nearly 16 percent since the start of the current calendar year and the trend remains bullish. 

Gold has rallied despite a sharp rise in bond yields in the USA and a rise in the value of the US dollar against major currencies. In a normal course, higher bond yields and a rally in USD triggers a decline in gold prices. This contra movement in the yellow metal raises the prospects of a further rally in the metal. 

Also Read: How to invest in gold for maximum returns

3. Silver

The junior precious metal has also started the 2024 calendar year on a strong note and has seen one of the sharpest rises in prices in many years. It is currently trading at US$ 28.5 per troy ounce, up 19 percent since the beginning of the current calendar year. 

What's more, the white metal has rallied nearly 25 percent from its yearly low hit in February this year. Many analysts expect a further rally in Silver given the low gold-to-silver price ratio and growing industrial use of the metal in solar panels and electronics. 

Historically, silver has outperformed in times of heightened political and economic uncertainty such as in the run-up to the Greek and Eurozone economic crisis in 2011-12 and the Covid-19 pandemic in 2020.

Also Read: Time to invest in silver now

4. Commodity stocks

War also induces a rally in the industrial commodities and raw materials such as steel, copper, aluminium, zinc and iron ore as countries rush to secure access to these strategic resources as conflict disrupts the commodity’s global supply chain. This was on full display during the initial phase of the Russia-Ukraine war when the prices of industrial metals had hit record highs. The trend is visible once again.

The London Metal Exchange Index which tracks the prices of industrial metals such as copper, aluminium, zinc, lead and tin among others is up 12 percent in the last two months and continues to trend up. 

This is positive for metal producers in India such as Tata Steel, JSW Steel, Hindalco, Vedanta, Hindustan Zinc and National Aluminium Company among others.

Also Read: Five ways to generate regular income after retirement

5. Jewellery companies

Jewellery makers such as Titan, Kalyan Jewellers and Senco Gold among others are indirect beneficiaries of a rise in gold and silver prices. The rise in gold prices increases their revenues in line with the rise in metal prices. Importantly, higher metal prices also boost their margins and profits as making charges on jewellery is directly linked to the price of gold. 

Most jewellers charge a fixed percentage of metal prices. On the downside, higher metal prices hurt jewellery demand and reduce sales volumes. However, historically, the listed jewellery makers have done well during periods of higher gold prices and vice versa. It should not be any different this time.

Happy Investing!

(Disclaimer: This article is for information purposes only. Readers are advised to consult a certified financial advisor before investing in any of the funds or securities mentioned above.)

(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist). 

Also Read: Five mid and small-cap stocks trading at a deep discount right now

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