When frightening headlines start dominating the news, some investors' first instinct is to think of how they can capitalise on it. Others want to stay far away. If you’re in the latter camp, the past week might have been quite worrying.
More important than the market concerns is the ongoing loss of lives. For those who have been affected in the past week in a more personal way, either through friends, family or directly, we hope you are safe and well.
While we will be focussing on the markets here as that is where our expertise lies, the human effects of this are always on our minds. Here is the insight we can provide you from a markets point of view:
Geopolitics don’t always cause a shake-up in stock markets, but when they do the effects may not be what you’d expect.
On the Monday (2 March) following the assassination of Iran’s supreme leader Ali Khamenei, when the US made their plans for further conflict clear, the S&P 500 ended close to where it started the day. But on Tuesday, the S&P 500 took a near 3% dip in the first hour and a half. By the end of the trading day, it had evened out to around a 1% drop.
Especially in the days immediately following a geopolitical event, markets can be unpredictable. Quick drops can just as rapidly turn into a rise, which can be a disconcerting pattern for investors.
But the reaction this week is not so far off what we’ve seen in previous starts of conflict for the US. The table below shows the S&P 500 in the two days leading up to and four days following the announcement of attacks on Afghanistan and Iraq, in 2001 and 2003 respectively, as well as this most recent strike on Iran.
In the year following the attacks on Afghanistan the price of the S&P 500 fell by 26.7%. But this was largely due to the dot com bubble, not the war in Afghanistan. In the year following the attack on Iraq, it ironically rose by the same amount, 26.7%. This isn’t to say the same will happen this time. It just shows that geopolitical conflict isn’t always the main driver for market prices in the long run. Other factors, like the AI theme in today’s markets can play an important role
Where you might find protection...
There are a few industries that are typically not heavily influenced by conflict, including consumer staples, utilities and healthcare. Regardless of what is going on at a global level, people still need food, water and medicine.
In addition, there are specialist funds in these areas. Often these are active funds, but increasingly, there are passive alternatives, often referred to as thematic funds.
Here are the funds with the best five-year performance record which have a focus on either the consumer staples, utilities or healthcare sector offered on AJ Bell’s platform.
Out of this list, just the top two funds outperformed the S&P 500 over the past five years. These sectors have their own risks. Utilities, for example, face changing regulation.
While typically more stable, it still doesn’t mean that keeping all assets in just these sectors will keep your money safe. The danger of these thematic funds is that when an event which does directly affect that industry arises, it can mean many of the holdings suffer in a similar way. Holding these asset classes as a section of a well-rounded portfolio, rather than the whole pie, can shrink that risk.
Some industries are positively influenced by conflict. For example, defence stocks typically rise in the face of conflict. This is not the right fit for all investors, however, as the money invested in these companies can be used to make weapons. If this does not align with your values, then focussing on the other sectors may be a better fit.
Investors in the FTSE 100 will have relatively large exposures to consumer staples and healthcare already. Healthcare accounts for over 13% of the index, and consumer staples for nearly 15%. This is thanks to companies such as AstraZeneca and Unilever. However, the FTSE 100 also has a large exposure to financials, at over 26%, which can be more volatile in times of conflict.
...And what may not be as safe as you think
Gold tends to get a lot of attention following a big market event, and it has seen some spikes again this time around. But interestingly, as of Wednesday 4 March, the gold price is up just 0.24% from a week ago, at $5,200. In that period, it shot up past $5,600 and fell to $5,020 before settling.
Many consider gold to be a safe haven asset, but it can also be extremely volatile. In the past year, gold has risen over 78%. But up until 2024, gold had barely risen above $2,000. While it can be a resilient asset in times of conflict, gold can also add to risks.
Investors may also be tempted to diversify away from the affected regions, but this does not always work as expected. For example, in the past, investors have rushed to buy up the Japanese Yen. This time around, the Yen has fallen against the US dollar by 1%.
Why? Investors would buy the Yen in these periods because Japanese companies had a pattern of bringing back their earnings back home from abroad in the face of conflict. But this time, companies are continuing to invest, meaning there’s no inflow of cash to Japan.
Changing economic and interest rate policy there also means that the Yen is less predictable than it has been previously.
Investors who are looking to different regions to avoid a conflict should consider what complications they may hold as well. If they have their own internal changes in motion, or are in the path of another conflict, their markets may still be impacted.
Remembering the golden rules
Diversification remains one of the most useful tools in an investor’s arsenal. Different areas of the market will be more resilient to different events, and while Iran is the main event on investor’s minds today, no one can know what’s around the corner tomorrow.
Investors who keep their portfolio spread around different asset classes, can ease the impact of these events. Often, when one area of the market suffers, another flourishes. By holding exposure to both, you can keep the scales a bit more balanced.
Hannah Williford: Content Writer
Hannah joined AJ Bell in 2025 as an investment writer. She was previously a journalist at Portfolio Adviser Magazine, reporting on multi-asset, fixed income and equity funds, as well as macroeconomic impacts and regulatory changes...
