The economic ripples from the Ukraine-Russia war have left the global market in a frenzy. Fuel and gas prices went up with inflation soaring in many countries. The prices of commodities have increased, creating a sharp dip in buying capacity of populations. The investor fraternity is panic-stricken about the future of their assets in the choppy markets.
In the wake of such massive destabilization in economies, portfolio diversification makes an even stronger case. Asset banks distributed across geographies and economies are resilient to sudden localized changes in any country.
Let's identify the risks of portfolios that are entirely invested in single economies.
Risk of Non-Diversified Assets
Asset allocation and diversification are two pillars of stability against market volatility and risk. Though investors plan for the former, the knowledge of the latter is usually undervalued and ignored.
When a portfolio of assets is localized, it is dictated by the micro and macro-economics trends in that region. The undercurrents of regional politics and social events are mirrored strongly in the economic market. Any unrest locally will have a first-order repercussion on the investments.
A diversified portfolio is risk-averse since there are no aggregated investments in one particular geography. Even if there were a calamity in one region and the assets suffered, the effect of those events would be subsequently mitigated by other assets in your basket.
Effects of the Russia-Ukraine War on the Global Market
The Ukraine-Russia crisis has left the world in economic unrest with repercussions still unfolding and speculative. Exports from Russia and Ukraine have dropped significantly post the sanctions.
With Russia being the biggest exporter of crude oil and semiconductor-raw materials, both of these markets will witness sky-high demand and prices. The rise in natural gas and oil prices will subsequently affect the commodities that rely on transportation.
Conversely, India and the UK, which were major exporters of pharmaceuticals to Russia, will experience the consequences of the ongoing war. A portfolio comprising pharma assets majorly in India is likely to face losses. On the contrary, strong economies like the US are relatively unaffected and upright.
Benefits of Portfolio Diversification
In times of global crises and wars, a diversified portfolio is an antidote to sudden losses.
1. De-risk your Investments
Diverse assets show low risk due to their independence from one particular currency and demographic. Decoupled markets provide the lowest correlation and hence risk.
2. Invest in Top Global Companies
Diversification allows you to invest in companies that are world leaders in their domain. You can invest in a US Silicon Valley startup while also investing in a clean-energy company in Germany.
3. Invest in a Mix of Assets Classes
You can create a robust portfolio by diversifying investments to gold and ETFs which are supposed to show low volatility.
4. Invest in Developed and Growing Economies
Yes, investing in a developed country is less risky, but large profits lie with the emerging companies in developing countries. A global portfolio makes up the risk of one with the stability of another.
While the future is uncertain and fickle, the best you can do is minimize risk and invest in a varied portfolio that ensures consistent returns. You should avoid behavioral biases to keep sentiments and impulsive decisions in check,