Geopolitical Risk and Markets

This article is part of an educational series designed to explain how we think about investing and client service at Lulworth Investment Partners. It is intended for general information only and should not be viewed as investment advice or a recommendation to buy or sell any asset. Anyone considering an investment should reflect on their own objectives, financial position and tolerance for risk, and seek regulated financial advice if needed.

Geopolitical risk is once again dominating headlines, leaving many investors uncertain about what current events may mean for markets and portfolios.

At Lulworth, we do not attempt to predict geopolitical events or short‑term market movements. Experience suggests this is extremely difficult to do consistently. Instead, we focus on building portfolios that maintain appropriate liquidity during periods of stress and avoid excessive reliance on any single source of risk or return.

This article explains why we take that approach and how it is supported by long‑term market experience.

The reality behind geopolitical risk

Any discussion of geopolitics should start with the human impact. Conflict brings suffering, displacement and loss of life. These consequences extend far beyond economics and financial markets.

In that context, discussing investment portfolios can feel uncomfortable. However, geopolitical events influence economies, markets and investor behaviour, whether we engage with them or not. Our role as investment managers is to help clients navigate those periods responsibly.

The current environment illustrates the challenge clearly. Conflict in the Middle East, disruption to energy supply chains and uncertainty around global trade routes have all heightened concerns about growth and inflation.

Despite this, global equity markets have remained relatively resilient and, in some areas, have continued to recover strongly. For many investors, that feels counter‑intuitive. If geopolitical risks are increasing, why are markets not falling more sharply?

Answering that question requires looking at how markets have behaved in the past.

What history tells us

History shows that markets do not always respond to geopolitical events in the way investors expect.

Major events often trigger short‑term volatility. Markets typically fall when uncertainty is highest, particularly in the early stages of a crisis when investors are trying to assess what might happen next. However, the longer‑term impact has often been less severe than initial reactions suggest.

The historical record supports this. The terrorist attacks of September 2001 were a profound shock to confidence and markets, yet equities recovered within months as attention returned to earnings and policy support. A similar pattern has emerged in more recent events. The election of Donald Trump in 2016 unsettled markets initially but was followed by a rapid recovery. More recently, the tariff shock of ‘Liberation Day’ in April 2025 and the ongoing conflict between the US and Iran created periods of heightened uncertainty. In each case, the initial market reaction proved a poor guide to what followed.

The point is not that these events were insignificant. Rather, markets tend to process new information quickly, often moving ahead of the news cycle. For long‑term investors, early market reactions are rarely the most informative.

This does not mean geopolitical risks can be ignored. Some events have had lasting consequences, particularly where they have disrupted energy markets or altered the broader economic backdrop.

The oil shocks of the 1970s are a clear example. Supply shortages led to sustained inflation, weaker growth and a more difficult environment for both businesses and consumers. Markets struggled because the underlying economic conditions changed in a meaningful and lasting way.

It is also important to recognise that the impact of geopolitical events is rarely evenly distributed. Even when broad indices remain stable or recover quickly, individual countries, sectors or companies can face sustained pressure. Businesses exposed to disrupted supply chains, sanctions or higher energy costs may be affected far more than headline indices suggest.

For investors, this is often where the more meaningful risk lies. It is less about predicting the next geopolitical event and more about understanding where portfolios may be overly exposed to a particular outcome.

Why markets can seem disconnected from events

Financial markets are forward‑looking. They respond less to current headlines and more to expectations about what may happen next.

At the outset of a geopolitical crisis, investors must consider a wide range of possible outcomes, including severe escalation. That uncertainty tends to drive volatility. As events develop and some outcomes become less likely, markets often stabilise, even if the underlying situation remains serious.

This can feel difficult to reconcile, particularly when news coverage remains intense. However, it is a familiar feature of market behaviour.

Markets also tend to move ahead of broader commentary. Businesses adapt supply chains, governments introduce policy measures and companies adjust investment decisions. Investors often begin pricing in these changes before they are fully reflected in economic data or widely discussed in the mainstream media.

The key point is that geopolitical risks rarely produce simple or predictable market outcomes. Short‑term reactions are difficult to forecast, and attempts to reposition portfolios around each major development can increase risk rather than reduce it.

There is also a practical challenge. Even if a risk is identified correctly, timing the market around it is rarely straightforward. Deciding when to reduce exposure, and when to re‑enter, requires a level of precision that is difficult to achieve consistently. A defensive position that appears sensible at the outset of a crisis can become costly if markets recover quickly. Equally, re‑entering too early can leave investors exposed if conditions deteriorate further. For most long‑term investors, remaining invested has historically proved more effective than trying to navigate each episode in real time.

How we think about geopolitical risk at Lulworth

At Lulworth, our approach starts from a simple premise: we cannot reliably predict geopolitical events or short‑term market reactions.

Rather than relying on forecasts, we focus on building portfolios that can remain resilient across a wide range of outcomes.

A central part of this is time horizon. Geopolitical events, however concerning in the moment, rarely alter the long‑term drivers of investment returns. Portfolios that are aligned with a client’s genuine time horizon are better placed to look through short‑term volatility without being forced into decisions driven by timing rather than judgement. Where capital is not needed for many years, temporary market movements need not become permanent losses. In periods of uncertainty, the ability to remain invested is often a significant advantage.

This is why we spend time at the outset understanding each client’s objectives, circumstances and investment horizon. That understanding shapes how portfolios are constructed and, importantly, how they are managed during periods of stress. A client with a long‑term horizon and no near‑term need for capital is in a very different position to one who may need to draw on their portfolio within a few years. Getting that alignment right is fundamental.

Alongside time horizon, diversification is a key part of how we manage geopolitical risk. We aim to ensure portfolios are not overly exposed to any single economic or geopolitical outcome. This requires looking beyond surface‑level diversification and assessing how investments behave in practice. Portfolios can appear diversified but still contain hidden concentrations.

A more considered approach is to combine different sources of return across regions, sectors and asset classes so that no single scenario is capable of driving overall portfolio outcomes. This helps reduce vulnerability to specific shocks and improves resilience across different market conditions.

These principles may appear cautious during calmer periods, but they become increasingly important when markets are under pressure.

A more practical way to think about uncertainty

Geopolitical shocks are likely to remain a regular feature of the investment environment. Their causes, timing and impact on markets will continue to be difficult to predict.

For investors, the more useful response is not to anticipate each event, but to ensure portfolios are robust to a range of possible outcomes. In practice, this means focusing on time horizon, maintaining appropriate liquidity, and ensuring diversification is both genuine and effective.

If you would like to discuss how we think about portfolio construction, please get in touch or subscribe to our newsletter to receive future articles as they are published.