Making the distinction between risk and uncertainty may seem simple, but it's important, according to a recent Saxo Bank study. When sufficient data is available, risks can be defined, but uncertainty is influenced by factors that are not measurable. By their very nature, geopolitical events center on uncertainty and the impossibility of making precise predictions about the future.
The events that followed Russia's invasion of Ukraine, according to Peter Garnry, head of equities strategy at Saxo Bank, hint to the formation of a war economy, particularly in Europe. There's a good chance that this will result in more government expenditure and ongoing inflation. As the geopolitical landscape changes and growing tensions between the US, China, and Europe become more significant, trade policies are also playing a bigger role in creating uncertainty and inflation. China's export-focused policies conflict with US and European national security objectives, with tariffs and industrial policies predicted to become more significant in the future.
Because of its reliance on exports, China's economy is vulnerable to changes in the value of other currencies relative to those of its rivals. In particular, the Japanese yen presents a serious threat, as noted in a report titled "The Double Whammy for the Chinese Yuan: Dollar Strength and Yen Weakness" by Charu Chanana, head of forex strategy at Saxo Bank. Recently, officials from South Korea have underlined the necessity of addressing abrupt, unilateral changes in currency prices, as these could trigger a significant reset in the currency markets.
improving investing portfolios going forward
Asset allocation was relatively simple in the past because of the distinct investing environment brought about by the protracted low bond yield period, the stable geopolitical climate, the favorable demographics, the lack of natural disasters, and the low inflation rates. Investors need to pay closer attention to global factors going forward.
The feasibility of totally investing in stocks and placing bets based solely on past performance may be questioned by some. However, depending on previous tactics that have worked well since the early 1980s now involves a major risk due to the multiple structural changes taking place in our global economy.
According to a research viewed by Al Arabiya English, Garnry recommends that investors include specific elements in their investment portfolios to strengthen their resistance to a variety of events in the age of a war economy and unfavorable demographic trends:
Putting money into important areas
The development of artificial intelligence and semiconductors will be crucial in determining future powers. With Europe's severe military capacity deficit and the requirement for innovative technology to combat drone swarms, the defense industry is also vital. The new operating system for businesses and governments alike is cybersecurity. Furthermore, by permitting decentralized energy distribution and diversifying energy sources—both of which naturally lower risks—the renewable energy industry lowers threats to national security.
sectors of strategic equity
The four most strategically appealing industries for long-term investment are healthcare, technology, banking, and energy, according to Saxo Bank's quarterly projections. These industries have the potential to produce sizable real returns over the next ten years, according to available data.
Gold
Gold has demonstrated its effectiveness as a risk diversifier in the past during periods of inflation and conflict, and it has done so once more recently.
Goods and Services
Rapid price increases for fundamental commodities have accompanied every significant inflation wave in recorded history. In the contemporary war economy, investing a portion of one's portfolio in commodities is a wise strategic move that works well as a buffer against changes in inflation. Furthermore, the shift to a green economy is probably going to lead to long-term trends in the pricing of copper and other key commodities.
Inflation-protected short-term bonds
Inflation-protected bonds are becoming a valuable addition to investing plans due to inflation rates surpassing forecasts. The principal values of these bonds are automatically adjusted in accordance with the official consumer price index. Because of their short maturity and comparable behavior to cash, short-term bonds offer portfolio managers flexibility while lowering exposure to the elevated risks associated with inflation.
To effectively navigate through unpredictable times, investors must adapt to this complicated economic landscape and reevaluate old investment tactics.
