Amid escalating geopolitical tensions and sharp rises in crude oil prices, global markets are grappling with increased uncertainty and volatility.Speaking to Kshitij Anand of ETMarkets, Alekh Yadav, Head of Investment Products at Wealth of the sanctuaryhighlights the importance of global diversification, recommending that investors allocate 10-20% of their portfolio to international assets.
Although opportunities remain in regions such as emerging markets and Japan, Yadav advises a staggered approach to new investments, given currency fluctuations and the evolving macroeconomic landscape.
It also highlights the need for disciplined rebalancing and selective exposure to commodities as investors navigate an increasingly complex global environment. Edited extracts –
Q) Geopolitical tensions appear to be intensifying in all regions. How should global investors interpret these developments from a macroeconomic and market perspective?
A) The conflict in the Middle East is causing a major oil shock, with almost 20% of global supplies affected via the Strait of Hormuz. With very limited alternatives, oil prices could rise sharply. If the conflict ends soon, markets could rebound, making current levels attractive for long-term investors, although oil could take time to stabilize and the economy could see short-term weakness.
If the situation continues, sustained increases in oil prices could slow economic activity, increase recession risks and lead to further declines in global and Indian stock markets.
Q) Historically, markets tend to react strongly to geopolitical shocks, but recover quickly. Is it time to diversify globally and which markets look attractive?
A) This situation differs from most past geopolitical shocks because it has a direct impact on the global economy. Given the uncertainty, global diversification remains important.
Before the conflict, emerging markets and Japan seemed attractive. We continue to like them, but suggest adding them more gradually. Even if some emerging economies suffer from rising oil prices, energy-exporting countries could benefit.
Japan, although an energy importer, is showing structural improvement as it emerges from a long phase of low growth and disinflation, supported by better corporate governance.
Q) How could rising crude oil prices and commodity volatility reshape the global investment landscape?
A) Even if the conflict ends quickly, countries will likely replenish their strategic reserves, thereby keeping global energy prices and inflation higher for longer. This generally puts pressure on stock valuations, particularly growth stocks, while supporting value and commodity-related sectors.
At the same time, energy-exporting countries and sectors such as oil, gas and mining are expected to benefit, while import-dependent economies could face margin pressures, currency weakness and slower growth.
Q) What role does rebalancing play during volatile periods when asset prices move sharply due to geopolitical shocks?
A) Sudden movements in asset classes can disrupt portfolio balance. Rebalancing restores the planned allocation by correcting these changes, thereby helping to manage risk, prevent overexposure and position the portfolio for recovery.
Q) What global ETF themes (such as technology, semiconductors or global indices) do you think investors should follow in the current environment?
A) We currently prefer a globally diversified approach, with an overweight to emerging markets and Japan and an underweight to US equities. We also favor the commodities sector and seek to gain exposure through global commodity ETFs as direct investment in commodities is not available in India.
Q) Ideally, what percentage of capital should be globally diversified for someone aged 30-40? And if someone wants to deploy new capital, what would you advise?
A) We recommend allocating 10-20% of capital to global diversification. For those considering this solution today, a staggered approach may prove prudent, especially given the recent sharp currency depreciation.
