Geopolitics in the market

Just when the economic uncertainty triggered by the trade war and economic tariffs seemed to be fading, geopolitics took over the markets' agenda in recent weeks. The direct U.S. intervention in the conflict between Iran and Israel worried the international community due to the greater risk of escalation and involvement of global powers.

This raised concern among investors but, at the same time, the market—beyond the painful humanitarian consequences—seems to assign a low probability to a relevant economic-financial disruption, for now. And that kind of approach is not necessarily new.

When examining the major geopolitical conflicts from the 1940s to date (World Wars, assassinations of presidents, terrorist attacks, etc.), we see that, on average, the market is cold and does not register large impacts on the stock market. The return on the day of the events averages -1%. Except for the 9/11 attack and the German invasion of France in 1940 (declines of -5% and -6% respectively), the return is not easily distinguishable from a normal day.

Even when there are effects, these are normally short-lived. On average, 1 year after these geopolitical stress events, the market return is 8% (10% median, which removes the extremes), that is, in line with the long-term performance of this type of asset.

The long-term investor must be able to overcome these moments of uncertainty with a diversified strategy and without making changes that move them away from their structural objectives.

Original publication in La Segunda on 01/07/2025