How best to safeguard your portfolio amid geopolitical risks

Israel has launched a retaliatory attack on Iran, but markets have shown a relatively muted reaction to the news. Carson Group Global Macro Strategist Sonu Varghese joins the Morning Brief to provide insights on how to navigate one's portfolio amid heightened geopolitical tensions.

Varghese notes that the strike Israel launched was "smaller than expected," and although it initially weighed slightly on markets when first announced, stock futures are now trading flat on the news. However, Varghese emphasizes that these geopolitical tensions underscore the importance of maintaining "value in protection" when building investment portfolios.

Varghese suggests that the key question to ask is: "Does this shift the macroeconomic regime that we are already in?" He explains that if the macroeconomic backdrop is already weak, "these sorts of geopolitical tensions add to that." Conversely, if the macroeconomic environment is strong, he does not believe that "geopolitical tensions will significantly exacerbate that."

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Angel Smith

Video Transcript

SEANA SMITH: So just walk us through I guess what you make of this morning's action here ahead of the open, and how big of a risk rising geopolitical tensions really pose here to investors at this point.

SONU VARGHESE: No. Thank you for having me. Geopolitical tensions, especially in the Middle East that's been on the cards really since last October, and then we saw oil prices spike at that time and then it fell. And we've kind of seen something similar, last night we were following markets. And there was a lot-- there was a fog of war, right?

But after everything-- all the reports came out, it seems like Israel's strike was smaller than expected in some ways, and Iranian officials are also downplaying it, which is why, I think, futures have rallied. S&P 500 futures have fallen about 1.7% last night when the initial reports broke, and it's rallied to almost flat right now.

And this is another reminder, like, even in our portfolios, we are overweight equities, we've been overweight equities since late 2022 at Carson Investment Research because we didn't expect a recession. But we still have protection in the portfolio. We have some gold in the portfolios, we have some treasuries.

Treasuries got a bid last night as well. 10-year Treasury yields jumped from about 465 thereabouts down to 450, and now it's back up again. So it just goes to show that there is value in protection in all these safe havens, even though, like I said, we are overweight risk assets here.

BRAD SMITH: What type of risk assessment would you place on the ongoing tensions though as we're continuing to, of course, see the retaliatory strikes happen, but of course, the state media downplaying that at this point in time and how investors are going to run through that risk assessment as well?

SONU VARGHESE: For the most part, what we are focused on is, does this shift the macroeconomic regime that we are already in? Historically, if you look back at events like this, whether it's the Cuban Missile Crisis, President Kennedy's assassination, even more recently, Israel's strike against the Iranian general a few years ago, if we were in a recession if the macroeconomic backdrop was already weak, these sort of geopolitical tensions add to that, it makes things even weaker.

But otherwise, if the macroeconomic backdrop is strong, which is what we believe right now, payloads are strong, consumption is strong, the production side of the economy is coming back as well. So in that event, I don't think-- we don't think geopolitical tensions will significantly exacerbate that.

SEANA SMITH: So Sonu, where are you seeing opportunity in the market? We have certainly seen I guess you could call it a flight to safety, certainly a risk off sentiment really dominate the market's narrative, at least this week. Is this something that you see continuing as you look ahead, or will we see a bit of a reassurance as earnings season continues to get underway?

SONU VARGHESE: I think we'll see that reassurance. I mean, markets have been up a lot over the last 5, 6 months, 12 months really. Markets were up 30% through the end of March on a one-year basis. Remember last year this time, we were worried about regional banks failing and a larger banking crisis. We've gone-- I think we've moved past that now, and I think the economy is in a better place to the extent that investors are expecting that too if you look at Fed fund futures.

At the beginning of the year, markets were expecting about six to seven rate cuts. I think there was some feeling that, OK, inflation is falling, maybe the economy is slightly weaker as well. And maybe payroll growth will slow. We haven't seen that. Payroll growth has accelerated. Inflation has firmed. So markets are now expecting only about two rate cuts for the rest of the year.

I think it's stretched a little bit, the inflation firming narrative has stretched a little bit too far in the other side the pendulum has swung now. So we actually increased duration in our portfolios recently, right, as a function of that. We thought, OK, duration-- we were underweight duration since 2021 really, and we started moving back into duration through the end of last year. And even a couple of weeks back, we increased duration because we thought that narrative of inflation firming has gone too far.