You will be able to name the channels through which a geopolitical event moves asset prices.
When Russia invaded Ukraine on 24 February 2022, Marcus's first instinct was to check his portfolio, and his second was to wonder what to sell. He had no Russian holdings and no Ukrainian ones. Yet over the following months his account felt the war through oil prices, inflation data, interest rates and the US dollar. A geopolitical event rarely hits your portfolio directly. It travels through channels, and if you can name the channels, you can work out which of your holdings sit in the path.
Almost every geopolitical shock reaches asset prices through one or more of five channels.
Energy and commodities come first. Conflicts involving producers of oil, gas, grain or metals change expected supply, and prices move within hours. In 2022 Brent crude rose above US$120 a barrel in March, and European gas prices rose many times over during the year. Those prices then feed into inflation, company costs and central bank decisions.
Supply chains are the second. When a region that makes a critical component is disrupted, companies far away can't finish their products. The effect appears in delivery times and margins, often a quarter or two later.
Trade rules form the third channel. Tariffs, quotas and export bans change who can sell what to whom, and at what price. Lessons 4.3 and 4.4 cover chips and tariffs in detail.
Sanctions are the fourth. Freezing assets, cutting banks off from payment systems or banning purchases from a country can wipe out the value of holdings there and force companies to write off whole businesses. Many Western companies with Russian operations took large write-offs in 2022.
Capital flows are the fifth. Investors pull money from places that look riskier and move it to places that look safer, which moves currencies, bond yields and share prices in countries not involved at all.
Markets don't wait for events. They price the probability of an outcome and move every time that probability changes. So the biggest reaction often comes before the event itself.
In January and early February 2022, as Russian troops gathered at the Ukrainian border, oil rose and shares were already falling. In 1990, after Iraq invaded Kuwait in August, oil prices roughly doubled within months and shares fell. When the US-led air campaign began in January 1991, US shares rallied strongly on the first day, because the worst uncertainty was resolving. Traders summarise the pattern as "sell the rumour, buy the news", and while it doesn't always hold, it holds often enough that waiting for the event before acting usually means acting late.
In the first days of a major shock, money tends to move into a small set of assets seen as safe. The US dollar usually rises, because it's the currency the world borrows and settles in. Gold usually rises. High-quality government bonds, especially US Treasuries, often rise too, and their yields fall as they do.
These moves can reverse quickly once the range of possible outcomes narrows. They also have exceptions. In 2022, government bonds fell for most of the year, because the shock pushed inflation higher and central banks raised rates. Safe havens are a tendency in the first days, not a rule for the whole episode.
For Marcus, the safe-haven channel shows up mostly through the US dollar. A rising dollar adds to the SGD value of his US holdings, the effect from lesson 3.5, The dollar cycle and what a strong dollar does to Asian assets.
Analysts separate two things. The first move is the price reaction in the days and weeks after the shock, driven by fear, uncertainty and positioning. The earnings effect is the change in what companies actually earn, which takes quarters to show up in results.
The two can point in different directions. A company's shares can fall hard on day one because investors sell anything in the affected sector, then recover as results show little damage. Or the first move can be mild while the earnings effect builds slowly and lasts for years. European chemical makers that depended on cheap Russian gas are an example of the second kind: their costs rose through 2022 and their results showed it well after the headlines had moved on.
The question that matters for a long-term investor is the second one. Has this event changed what the companies I own will earn over the next several years? Lesson 4.7, Which headlines fade from prices and which do not, returns to how to judge that.
For the activity, pick one geopolitical event from the past five years that you remember, and go through the five channels one at a time, writing down for each whether it moved prices and which assets it touched.
Pick one geopolitical event from the past five years and list each channel through which it moved prices.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).