Kristina E. Vella
The recent conflict in the Middle East has caused volatility to increase among equities, commodities and fixed-income markets, introducing a new source of uncertainty for investors.
Geopolitical shocks create an environment of heightened uncertainty, rapid market swings and sudden shifts in global risk appetite. During times of geopolitical uncertainty, markets react sharply to such events, causing bouts of volatility before eventually stabilising and recovering.
However, during a period of decline, active portfolio managers have the agility to adjust portfolios immediately as new information emerges and reduce exposure to vulnerable sectors and reallocate towards assets that benefit from shifting conditions.
Since the US-Iran war began, energy supplies have been disrupted, as about 20% of global oil and liquefied natural gas (LNG) shipments pass through the Strait of Hormuz, making it one of the world’s most sensitive geopolitical chokepoints. When tensions escalate, energy markets react immediately, often with significant price spikes.
The closure of the Strait of Hormuz has driven Brent crude oil to surge past $100 per barrel. Markets have also witnessed sharp swings in other commodity prices; for instance, European benchmark gas prices spiked by nearly 40% following disruptions at production sites. Furthermore, the crisis has resulted in regional instability due to significant disruptions to global logistics, causing major ocean carriers to suspend transit and affecting several regional stock exchanges.
During such periods, an active portfolio management strategy becomes essential, as it responds to fast-changing geopolitical and economic events. Active portfolio managers make informed decisions rather than simply tracking an index, offering meaningful advantages during times of crisis.
Active porfolio management is a vital tool for protecting capital, managing volatility and capturing opportunities that result from market movements. It relies on flexibility, adjusting positions quickly in response to events and emerging risks, which makes it a strategic asset. When markets are calm, passive strategies often perform well because broad indices tend to rise steadily over time. However, crises disrupt these patterns.
Geopolitical shocks can cause correlations between asset classes to break down, sectors to diverge sharply and risk premiums to widen. In such an environment, the ability to adjust positions quickly becomes a strategic advantage.
“While no strategy can eliminate risk entirely, active portfolio management provides the agility, insight and discipline needed to navigate turbulent markets”
In the case of the Middle East conflict, an active manager can reduce exposure to sectors that are particularly vulnerable to rising energy costs while increasing allocations to those that may benefit, such as energy producers or defence companies. Passive investors, by contrast, remain fully exposed to whatever the index holds, regardless of shifting risk dynamics.
Active management also enables dynamic asset allocation, a crucial tool during periods of heightened uncertainty. Instead of maintaining a fixed mix of stocks, bonds and other assets, active managers can adjust allocations based on evolving conditions. For example, they may increase cash holdings to preserve capital, shorten bond durations to reduce interest-rate risk or add exposure to commodities as an inflation hedge. This adaptability helps cushion portfolios against sharp drawdowns and provides opportunities to re-enter markets at more attractive valuations.
In addition, geopolitical crises often have uneven regional impacts; the Iran conflict, for instance, may affect Middle Eastern markets more directly than those in Europe or North America. Active managers can tilt portfolios away from regions with elevated geopolitical risk and towards those with more resilient economic fundamentals. This targeted approach helps reduce exposure to localised shocks that may not be reflected in global indices.
In uncertain times, investors often seek stability and clarity. While no strategy can eliminate risk entirely, active portfolio management provides the agility, insight and discipline needed to navigate turbulent markets.
As the Iran conflict continues to shape global economic conditions, the case for active management becomes even more compelling.
Kristina E. Vella is an investment specialist at BOV Asset Management Ltd.
Opinions, estimates and projections in this publication constitute the current judgment of the author as of the date of this publication, and should not be construed as investment advice. BOVAM makes no guarantees, representations or warranties and accept no responsibility or liability as to the accuracy or completeness of the information contained in this document. BOVAM has no obligation to update, modify or amend this publication or to otherwise notify a reader thereof in the event that any matter stated therein, or any opinion, projection, forecast or estimate set for the herein changes or subsequently becomes inaccurate. All information and data are correct at the time of publishing. BOV Asset Management is licensed to conduct investment services in Malta under the Investment Services Act (Cap.370 of the laws of Malta) by the Malta Financial Services Authority. Issued by BOV Asset Management Limited registered address 58, Triq San Żakkarija, Il-Belt Valletta, VLT 1130, Malta. Tel: 2122 7311, Fax: 2275 5661, e-mail: [email protected], website: www.bovassetmanagement.com. Source: BOV Asset Management Ltd.
