How to limit exposure to individual risks, such as the Middle East conflict?

Investing.com — To limit exposure to individual risks, such as the ongoing Middle East conflict, analysts at UBS suggest a strategy centered on diversification and targeted asset allocation. 

While the current escalation between Israel and Hezbollah in Lebanon raises concerns about wider regional instability, the broader global market impact remains somewhat contained for now. 

However, in the event of further escalation, especially one that involves Iran and the U.S., disruptions to energy supplies could affect oil markets and heighten global financial volatility.

”We highlight the importance of diversified portfolios to limit the exposure to individual risks, but recommend staying invested to benefit from an overall supportive macroeconomic backdrop,” said analysts at UBS in a note.

Given the potential impact on oil supply routes like the Strait of Hormuz, exposure to oil-related assets can serve as a hedge against energy disruptions. 

While oil prices have remained stable so far, any major disruption could drive prices higher, “damage to critical oil infrastructure could see Brent crude prices break above USD 100/bbl for several weeks,” the analysts said.

UBS also flags gold as a valuable asset to include in portfolios during times of geopolitical tension. With gold prices rising nearly 30% this year, further gains are expected, driven by a combination of the U.S. Federal Reserve’s anticipated rate cuts, seasonal increases in jewelry demand, and ongoing central bank purchases. 

Gold is seen as a safe haven during market uncertainty, providing a stabilizing effect within a diversified investment portfolio.

Analysts recommend maintaining exposure to high-quality credit assets, which can offer stability amidst market volatility. 

While the Israeli shekel has weakened due to the conflict, placing additional pressure on the country’s fiscal outlook, global markets should still focus on broader economic drivers, especially if the conflict remains regionally contained.