What does geopolitical uncertainty mean for international investors?

The violent suppression of the Iranian uprising, a U.S. president eyeing other countries, and the ongoing war in Ukraine: the world is in a period of rising international tensions, with immense human suffering as a result. This also raises the question of what geopolitical uncertainty means for international investors. We asked Thijs Knaap, Chief Economist at APG.

Is there a proven approach for investors in situations like these?
“In general, we don’t do anything different than usual: investing is all about managing risk. Things can turn out worse than expected, but also better. We always ask ourselves whether it’s time to enter or exit a position. In that sense, international investors need to be able to handle risks—even when those risks stem from global tensions. And they usually can, especially when we have time to assess what’s really going on. Of course, there are countries where nothing ever seems to happen, like Norway or Sweden, and regions where it’s rarely calm, such as the Middle East. Investment theory says that countries with a high risk of explosive situations carry a higher risk premium. In other words, investors want to be compensated for taking on that risk. If you invest in a country where nothing ever happens, you’ll earn a return. But if you invest in a country where tensions are constant, you risk losing your money. On average, though, such high-risk investments deliver higher returns than ‘safe’ ones.”

But investors won’t always have time to assess a situation.
“That’s true—we’re assuming an ideal scenario where you know exactly how high the risk is. In reality, predicting the outbreak of war or the return of peace is much harder. Do you stay put during tense times and collect the risk premium? Experience shows that investors who try to escape risk often don’t fare well. They tend to exit too early and re-enter too late. Most geopolitical tensions eventually fizzle out, and a few years later we barely remember them.”

Does the type of investment matter?
“Geopolitical tensions—and especially war—do affect stocks. We saw this with the S&P 500, the well-known U.S. stock index, during the Gulf War. On the night of January 16–17, 1991, the first bombs fell on Baghdad. In the run-up to the war, the S&P dropped about 3 to 4 percent. But within days, it became clear that the U.S. and its allies would drive Iraqi forces out of Kuwait, and stock prices shot back up. If you had sold your shares at the end of 1990 because of heightened tensions in the Gulf region, you would have avoided the initial loss—but also missed the rebound. Research confirms that stocks typically fall about 3 to 4 percent in such situations, then often rise by twice that amount if things end well.

The consensus is that if you’re worried about global tensions, stocks are generally a safer bet than bonds. Bonds are usually considered the safest option because you get your principal back. But after a war, that money is often worth less than before, while stock prices tend to recover. Two well-known examples are Germany and Japan during World War II. Bond values fell by 95 percent, and stocks plunged 90 percent. Yet shares of companies like BMW and Mitsubishi eventually rebounded, allowing investors to recover their money—while holders of government bonds from those countries never saw theirs again. Interestingly, physical assets like real estate and infrastructure also tend to rise in value despite the destruction wars bring. That’s because whatever remains standing becomes more valuable.”

When European countries decided to ramp up defense spending in response to Russian threats, defense stocks soared. What other standouts are there?
“Defensive stocks—companies that perform steadily regardless of circumstances—are a well-known example. On the other hand, companies with long value chains spanning multiple countries or continents face higher risks. The classic safe havens for investors during wartime are oil, gold, and the U.S. dollar. The strength of the dollar is largely based on trust in U.S. institutions. That’s what makes the current era so tense and confusing, because those very institutions are being questioned under President Donald Trump’s policies. So it’s important to keep reassessing your assumptions—even investments traditionally seen as safe. History shows that investors who remain patient and stay put during tough times, or even buy more, often come out ahead.”