(BFM Bourse) – In recent years, the geopolitical landscape has been significantly recomposed, creating an economic environment characterized by high uncertainty and rising inflation. In this uncertain context, Saxo Bank provides its keys to composing a portfolio ready to face the new geopolitical era.
Geopolitical risk has been remembered fondly by financial markets in recent weeks, with recent developments in the Middle East. The year 2024 is, moreover, a year full of electoral deadlines, a prospect which now worries American investors more than inflation, according to a study by Janus Henderson published last November.
“Investors have reluctantly adapted to a new normal characterized by great geopolitical and economic uncertainty,” recalled eToro in a previous note.
The “smart” investor will therefore have to integrate a constantly changing geopolitical world without their software, warns Peter Garnry, director of strategy at Saxo Bank.
“Asset allocation was easy in the past, with 40 years of falling bond yields, a rather stable geopolitical landscape, positive demographics, the absence of climate disasters and low inflation,” he says.
With this safe haven in the rearview mirror, it will be difficult for investors to “just invest 100% in stocks and bet on the fact that history will repeat itself,” he adds. This strategy is no longer relevant given the dark clouds gathering in the geopolitical sky.
Deviating from the traditional 60/40
To help investors see more clearly, Saxo Bank reveals the most important elements to take into account to strengthen a portfolio “in the era of the war economy and strongly negative demographic trends”.
Peter Garnry’s suggestions deviate from “the traditional 60/40 portfolio (60% stocks and 40% long-term bonds)”. However, the specialist does not give weighting to each category, since each “investor is different”, he recalls.
In terms of sectors, Saxo Bank cites semiconductors and artificial intelligence which “will be determining factors” for governments in the future, as will cybersecurity, “because it is the new operating system key for any government and any business.
The defense is also designated by Peter Garnry. This sector has not come down from its stock market cloud since the outbreak of the war in Ukraine, a little over two years ago. According to him, Europe “suffers from a significant deficit in military capabilities” while new technologies are needed to deal with drone swarms.
In the days following the outbreak of the conflict in Ukraine, Germany announced an exceptional envelope of 100 billion euros via a special fund to increase its military investments.
The revival of geopolitical tensions in the Middle East has also put this once neglected sector back on the radar of investors. The recent rise in defense values “is obviously explained by the flaring up of the conflict between Israel and Hamas. This event occurred at a time when investors were beginning to question the sustainability of increases in military budgets,” indicated end of February Yan Derocles, analyst at Oddo BHF.
Saxo Bank also cites the values of “renewable energy, which from a national security perspective is less risky due to the absence of a power source and energy assets can be distributed in a decentralized manner, reducing costs risks by nature.
“In our quarterly outlook, we indicate that the four most attractive sectors at present from a strategic point of view (for the long term) are healthcare, technology, financial services and energy. These sectors are most likely, given the information we have today, to offer high real returns over the next ten years”, also recalls Saxo Bank.
Raw materials, anti-turbulence shield
Regarding assets, Peter Garnry cites gold, which in his view has always been a good element of risk diversification in times of war and inflation, especially since the “recent geopolitical period has once again proven,” notes the specialist. The “barbaric relic” as the economist John Maynard Keynes nicknamed it recently exceeded the threshold of 2,400 dollars per ounce and is moving close to its historic record, now located at 2,431 dollars, with the recent resurgence of tensions in the Middle East.
On the commodities side, Saxo Bank recalls that “all the most serious inflationary shocks in history have been associated with a rapid rise in commodities”. The stock market investment specialist believes that it is wise to be exposed to raw materials “in times of war economy and to protect against inflationary shocks”.
“The green transformation could also trigger sustainable trends in key commodities, including copper,” adds Saxo Bank. The first metal worked by man has jumped more than 10% since the start of the year, to reach $9,500.
Short-term bonds and inflation-protected bonds are also in Saxo Bank’s toolbox. In a context of persistent inflation, bonds protected against price increases “are worth considering” says the financial investment broker.
Regarding short-term bonds, they have the virtue of offering an option and “essentially act like cash, because they have a short duration and are therefore less risky in the event of high uncertainty about inflation”.
Sabrina Sadgui – ©2024 BFM Bourse