When Hormuz enters the portfolio

For a long time, investors were able to treat geopolitics as background noise. Music that was sometimes unpleasant but rarely decisive. To build your portfolios, you had to pay attention to earnings, rates, inflation, margins, productivity and valuations. The world map remained on the wall, but you had little interest in locating Ukraine, Taiwan or the Strait of Hormuz on it. That time is long gone.

Geopolitics is no longer an external risk. It has once again become a key variable in asset management. It no longer causes just a few bouts of volatility before falling off the radar. It is redefining supply chains, energy routes, national budgets, central banks’ policies, industrial priorities, capital flows and the winning sectors. Any investor who ignores it nowadays is like a driver merrily following his GPS without noticing that the road is blocked, the bridge closed and the petrol pump attendant on strike.

The conflicts in Ukraine and the Middle East, Chinese-American rivalry, the fragmentation of global trade, the militarisation of energy and the vulnerability of straits show that markets can no longer be analysed solely through the traditional macrofinancial prism. The world is no longer globalising with ease. It is regionalising, fragmenting and protecting itself. Companies are no longer striving merely for cost-effective production. They must also consider where to produce, with whom, under what political protection, with which critical dependencies and in the light of what shortage risks.

This change has a cost. More secure value chains are often more expensive. Strategic stocks tie up capital. Duplicating production sites places a burden on margins. Energy, technological or military security is essential, but it never comes free of charge. The geopolitical risk premium is therefore not a temporary accident. It is becoming a structural component in the cost of capital.

The most visible consequence is the emergence of a super cycle of investment in defence, technology and critical infrastructure. The war in Ukraine has reminded Europe of the cost of several decades of military underinvestment. The fall of the Berlin Wall had led to a corresponding drop in Europe’s military spending. This excuse to take things easy is now being paid for dearly.

European rearmament, air defence, drones, missiles, cybersecurity, military artificial intelligence, surveillance, secure communications, energy infrastructure, transport networks, the reconstruction of Ukraine: it is not a sectoral trend but regime change. Public and private spending will be lastingly redirected towards security, sovereignty and robustness. Future portfolios will have to incorporate this new reality.

Energy and trade routes are also becoming strategic assets. The Strait of Hormuz, pipelines, ports, undersea cables and rail corridors are no longer logistical details. A company exposed to an unstable area, dependant on a single supplier or a prisoner of a vulnerable corridor no longer necessarily merits the same price-to-earnings ratio as before. Conversely, firms that secure, diversify or restructure these flows can benefit from the new world order.

These new circumstances are also making life complicated for central banks. For twenty years, they primarily managed demand, inflation and expectations. They must now factor in supply shocks that are geopolitical in origin, such as energy, sanctions, tariffs, reshoring and military spending. A central bank can raise its rates. It cannot open a strait, sign a ceasefire or produce semiconductors instead of Taiwan. The Fed, the ECB and the SNB will therefore remain key for markets, but their power is increasingly coming up against a political reality that they do not control.

These major geopolitical disruptions are not solely threats. They also create investment opportunities. Defence, artificial intelligence, cybersecurity, robotics, energy, critical infrastructure and European reconstruction are set to benefit from long-term trends. Often treated as the poor relation of global growth, Europe could rediscover an interest in sectors related to sovereignty, industry and security.

But it is not enough to buy a sector. You have to identify the real winners: those with a technological advantage, a solid balance sheet, pricing power and the ability to turn public orders or strategic needs into lasting profits. Geopolitics can create demand. It does not always guarantee margins.

Equities therefore remain attractive, but not all of them. The US stock market retains its depth, liquidity and technological leadership. Artificial intelligence is continuing to support growth forecasts. But high valuations make markets vulnerable to disappointments, real rates and crises of confidence. Against this backdrop, diversification is a must when building a portfolio.

The lesson is simple: geopolitics does not replace financial analysis. It enriches and complicates it and makes it more indispensable. Earnings, rates and valuations still count. But they must be interpreted in the context of a more contentious, more fragmented and more strategic world.

Investors can therefore no longer only read profit and loss accounts. They must also scrutinise maps, alliances, sanctions, military budgets, undersea cables and industrial sovereignty initiatives. In the past, it was enough to follow the Fed. In the future, you will also have to keep an eye on Hormuz.

Biography

Michel Girardin is a Visiting Professor of Macro-Finance at the University of Geneva, where he has been teaching since 2012. He is also the founder and Partner of MacroGuide Ltd, an investment advisory firm. He brings more than 25 years of experience as Chief Economist and Chief Investment Officer in the Swiss private banking industry, combining academic expertise with extensive investment management experience. He teaches the "Wealth Management and Law in Practice" course in the Master of Science in Wealth Management programme. He also directs the online "Investment Management" courses on Coursera, which rank among the world's five most popular investment courses and have attracted more than 1.5 million learners to date. In addition, he directs "Maîtrise des marchés financiers", an online executive program offered by the University of Geneva's Centre for Continuing and Distance Education. The program is accredited by the Swiss Association of Wealth Managers for continuing professional education. Michel holds a PhD and a Bachelor's degree in Economics from the University of Lausanne, as well as a Master of Science in Economics from the London School of Economics. He is also a Board Member of the International Center for Monetary and Banking Studies (ICMB), chaired by the Chairman of the Swiss National Bank.