Tensions between Iran and Trump are causing uncertainty in the global financial markets and have created a classic “risk-off” environment for investors.
Geopolitical Uncertainty Creating Loss Of Investor Confidence
Geopolitically, the market has quickly reacted to increased tensions due to Trump’s comments on the possibility of conflict in Iran.
As uncertainty increases, so does the fear of financial loss, creating disinvestment in riskier assets.
What Is A Risk-Off Environment?
In a “risk-off” environment:
Investors move money away from higher-risk asset classes such as equities and crypto.
Investors put more money into lower-risk asset classes such as hard assets (i.e., gold) and the U.S. dollar.
Historically, these types of environments occur during:
Political instability.
Military conflict or the potential for war.
Global uncertainty.
How Are Markets Responding?
Markets are reacting negatively once again!
Equity markets, which are typically high-risk markets, are far below where they were during the 2008 financial crisis.
The same is true for the crypto market, which is known for its volatility; however, it is less clear what will happen to those markets.
The “safe-haven” assets, namely Gold and the U.S. Dollar, have witnessed a significant increase in their value compared to Equities and other Total-Risk Assets, both historically and in the current context.
Investor Confidence has diminished because of the uncertainty regarding future developments and as such investors are less willing to risk their capital if there is not a realistic opportunity to receive a larger potential return.
What Should I Consider As An Investor?
In light of the situation currently outlined above, the following is true:
Capital Markets have the ability to make large capital market investments the moment new global currency news is released (time required after announcement is given).
During uncertain times, investors should create diversified portfolios to help ‘reduce’ risk and therefore diminish possible losses.
Utilize ‘sound’, ‘responsible’ and ‘effective’ Risk Management practices to ‘help’ reduce the risks of loss.