Matthew Quaife, Global Head of Multi Asset Investment Management and leading the Multi Asset investment team at Fidelity International, says they are positioning for the medium term during these times of geopolitical uncertainty.
Geopolitical developments involving Iran remain fast-moving and difficult to forecast with precision. For financial markets, the key transmission channel continues to be energy.
The overall impact will depend on how long oil prices remain elevated, with a persistent rise having clearer implications for inflation dynamics, policy expectations, and growth.
In the near term, we expect elevated market volatility and the potential for temporary shifts in cross-asset correlations as investors reassess risks and price a wider range of outcomes.
Periods like this can challenge traditional diversification, particularly when inflation and geopolitical risks combine.
This environment reinforces the importance of careful portfolio construction, combining diversified core exposures with sources of return that are less dependent on a single macro outcome.
In practice, this often means blending traditional assets with uncorrelated or diversifying exposures, including select commodities, absolute-return strategies, private assets, currencies, or options-based approaches where appropriate, which can help to stabilise portfolios when volatility and correlations rise.
Investors have long relied on the negative correlation between equities and government bonds to provide ballast during risk-off periods.
However, structural changes in the macroeconomic landscape are challenging this paradigm, altering the behaviour of asset correlations and reducing the reliability of the traditional 60/40 equity-bond mix.
In an environment where geopolitical tensions risk adding to energy price pressures, and therefore to inflation volatility, we believe investors must be prepared for correlations to remain more unstable than in the pre-pandemic era.
That does not render traditional assets redundant, but it does suggest a broader toolkit may be beneficial.
Preparing portfolios for uncertainty
True diversification requires more than simply holding additional assets.
The goal is to include exposures with distinct return drivers. Our framework for diversification emphasises strategies that deliver differentiated sources of return that react differently across macro regimes.
These can complement traditional beta while enhancing return potential and risk mitigation.
Alongside structural diversification, active asset allocation remains a crucial tool to manage the challenges and opportunities of abrupt changes to conditions and higher volatility.
Heightened geopolitical risk tends to increase dispersion across regions, sectors, and styles. In such an environment, the opportunity set for active managers can expand.
The flexibility to adjust exposures as conditions evolve, including managing equity and duration risk dynamically, varying regional and style tilts, actively managing currency risk, and using tactical hedges where appropriate, helps us respond to changing risk-reward dynamics, and to differentiate between short-term market noise and genuine shifts in the underlying outlook.
Active management is also central to navigating inflation uncertainty. Duration exposure can be calibrated according to policy expectations and term premia.
Equity allocations can tilt towards sectors with stronger pricing power or structural growth drivers. Currency exposures can be adjusted to reflect shifting capital flows and policy divergence.
In our view, this adaptability is especially valuable when correlations are unstable and the range of macro outcomes is wide.
Within this framework, gold continues to play an important role.
We maintain a positive view on gold both as a safe haven asset during periods of geopolitical stress and as a hedge against inflation, fiscal expansion, and confidence shocks, particularly at times when bond and equity correlations are less reliable.
Where appropriate in our portfolios, we are also using options-based hedges and dynamic duration management.
These approaches allow portfolios to respond to abrupt repricing in risk premia, whether driven by shifts in interest rate expectations or sudden risk aversion.
We prioritise building multiple layers of protection rather than relying on a single defensive asset. This means combining dynamic risk management techniques with diversifying return streams and active risk budgeting.
This layered approach can help manage downside risk while maintaining exposure to long-term growth opportunities.
Positioning for the medium term
Looking beyond near-term volatility, we retain a constructive medium-term outlook for equities due to broadly resilient earnings growth and supportive policy settings.
Episodes of geopolitical uncertainty, such as the current conflict centred on Iran, can increase short-term volatility, but they also create relative value opportunities as markets overshoot in pricing risk.
We expect dispersion across regions and sectors to remain elevated. Consistent with our approach, we stand ready to act dynamically when risk-reward conditions are favourable.
We continue to monitor developments closely, particularly energy markets and the impact on inflation, and remain focused on navigating near-term uncertainty while keeping portfolios aligned with longer-term investment objectives.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The writer’s views are their own and do not constitute financial advice.
This information should not be relied upon by retail clients or investment professionals. Reference to any particular investment does not constitute a recommendation to buy or sell the investment.
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