Geopolitical risk is increasingly influencing global markets, with conflicts and tensions driving both short-term volatility and longer-term structural shifts. These events tend to reprice assets through two primary channels: energy and commodities, and defense spending.
Energy markets respond immediately to disruptions such as sanctions or supply route risks, often leading to price volatility. At the same time, governments typically increase defense budgets during periods of instability, creating sustained demand for defense-related industries. Global military spending reached approximately $2.72 trillion in 2024, while more NATO members are meeting defense spending targets, reflecting a structural shift in fiscal priorities.
These dynamics can alter correlations across asset classes, reducing the effectiveness of traditional diversification strategies. Energy and resource equities may exhibit asymmetric volatility depending on the nature of each shock, while defense equities can behave more defensively due to consistent government demand.
For institutional portfolios, this environment requires a more targeted approach. Identifying transmission channels, incorporating scenario analysis, and managing position sizing are increasingly important when integrating geopolitical risk into portfolio construction.