When the U.S. and Israel attacked Iran on Feb. 28, roughly 20% of the world's oil supply was put at risk of being heavily delayed or cut off entirely. Now, with oil shipments delayed and a global recession looming due to an approaching energy shock, the financial consequences of the conflict are looking like they will be substantial -- potentially even severe.
For anyone with a portfolio holding a standard mix of U.S. stocks and bonds, this experience has been a reminder that geopolitical risk is something you can't ignore if you want to sleep soundly at night. With that in mind, let's look at how a few of the top institutional investors are reacting to the conflict to reposition their portfolios this month.
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Hard assets are popular for a reason
Goldman Sachs' head of asset allocation, Christian Mueller-Glissmann, believes that after the historic run over the last 15 years by U.S. tech stocks driving global equity returns, most portfolios now carry too much exposure to growth assets, and too little inflation protection.
His investment bank recommends dividing portfolio holdings among innovation stocks, inflation hedges, and risk mitigation assets, with the inflation segment receiving the most urgent upgrade in light of an energy shock likely to soon be driving rising prices for goods and services. Goldman specifically named gold exchange-traded funds (ETFs) like the SPDR Gold Shares, (GLD +0.78%), inflation-protected Treasuries, and infrastructure stocks with real growth in cash flow as favored positions.
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Key Data Points
On that note, gold has generally dominated the conversation because of its reputation for being a safe haven asset and inflation hedge. Ray Dalio, the founder of the Bridgewater Associates hedge fund, reinforced his recommendation for 5% to 15% portfolio allocation to gold this year.
But gold isn't the only place to look for stability in the current chaos. Wells Fargo has favored energy stocks and commodities over gold in this particular conflict, reasoning that a war whose primary transmission channel is oil prices incentivizes direct commodity exposure.
Flexible portfolios need more than one trick
If finding inflation hedges is one side of the repositioning process, the other side is thematic stock exposure that's anchored by high quality, cash-generating businesses that tend to perform in every kind of economy.
For its part, Goldman's framework similarly favors value stocks and certain infrastructure companies like utilities and pipelines that generate real cash regardless of the price of oil. Many of those stocks would be at home in a normal all-weather portfolio. By contrast, Morgan Stanley has urged investors to increase positions in defense and aerospace stocks, calling them a multiyear beneficiary of rising government spending.
For what it's worth, the one thing that almost nobody is suggesting is to build up your portfolio's allocation to tech stocks or healthcare stocks. So, there might actually be a few hidden gems in those sectors if you're willing to hunt for them.
But whatever you do, don't dump your growth holdings or accept being sidelined from the market at the moment. As challenging as market conditions are right now, and as uncertain as things may be, it's smart to take a lesson from the investing professionals here: Expand your horizons for what it means to play defensively with your portfolio.
Basic activities like diversification and holding a little bit of cash should continue. At the same time, look for opportunities to make your capital work double duty by protecting you against more than one risk at a time.
For instance, buying gold could protect you from inflation driven by increased government spending on defense while also protecting you from the inflation caused by rising energy prices. Similarly, investing in infrastructure businesses could give your portfolio exposure to their consistent cash flows, potentially guarding against some of the downside risks of a recession, while also helping to hedge against inflation from most sources.
There's not going to be any one perfect solution, so do your best to find a few assets with overlapping benefits to prepare your portfolio for whatever comes next.
