Recent global events, such as the Middle East conflict, have reinforced how quickly geopolitical tensions can surface and spill over into financial markets, contributing to heightened market volatility and uncertainty for investors. 

At the same time, the shifts in geopolitical relationships are contributing to a more fragmented international landscape. This has exposed strains in long-standing alliances, encouraged the formation of new ones, and increased uncertainty around global trade and supply chains.  

Against this backdrop, it is little surprise that geopolitical risk is front of mind for many investors.   

According to BlackRock’s Geopolitical Risk Indicator, market attention to geopolitical risk is close to levels last seen during the COVID-19 pandemic and Russia’s invasion of Ukraine, with risks such as the Middle East conflict, major cyber-attacks and terrorism currently assessed as having a high likelihood of impact. 
 

Chart: BlackRock Geopolitical Risk Indicator

BlackRock views rising geopolitical fragmentation as a powerful macro force that will continue to shape the global economy for years to come, with implications for inflation, growth and volatility.  

In an environment shaped by uncertainty and rapid change, how can geopolitical risk influence portfolio risk considerations?

Geopolitical volatility and portfolio implications

Geopolitical volatility can impact markets in different ways. Geopolitical risk events that disrupt global trade, energy supply or capital flows often have a more direct and immediate impact on international markets, while Australia’s domestic market may experience spillover effects through currency movements, inflation and sentiment. 

Regions that rely heavily on imported energy or major trade routes, including parts of Asia and Europe, have historically been more exposed to market shocks when disruptions occur.  

Although Australia is a major commodity exporter, it also imports a significant share of refined fuel and remains closely tied to global trade, meaning offshore events can still influence the local market, including fuel prices.  

The Australian sharemarket’s relatively concentrated sector composition, with the financials and resources sectors playing a major role, means that we may see uneven market responses. Periods of geopolitical stress can drive higher commodity prices in which companies in the resources sector may experience a boost in earnings. At the same time, higher inflation and interest rate uncertainty could weigh on banks and broader market confidence.  

For investors with international equity exposure, geopolitical risk can play out more directly. Global equities are often more sensitive to supply‑chain disruption and changes in trade and foreign policy settings, with currency movements adding another layer of variability for Australian investors. 

These dynamics highlight that understanding how domestic and international equity exposures may respond differently during periods of disruption is foundational to managing geopolitical risk within a portfolio.  
 

How ETFs can help position portfolios through geopolitical volatility [1]

Geopolitical risk is inherently uncertain, but its effects on markets may be felt through higher volatility, inflationary pressure and increased dispersion between winners and losers.  

In this environment, ETFs may allow investors to adjust exposures efficiently, making it easier to access greater diversification, rather than relying on market timing or concentrated positions. Here are three potential benefits of ETFs:
 

1. Gain exposure to essential services and infrastructure

Recent Middle East volatility has highlighted the importance of securing energy supply and strengthening supply chains. ETFs can provide access to listed infrastructure and essential‑services companies that support critical economic activity and have historically demonstrated greater resilience during periods of volatility compared to broader equity markets. 
 

2. Manage inflation risk driven by supply disruptions

Geopolitical events that disrupt energy and commodity markets can push up costs across the economy. Fixed income ETFs can provide exposure to asset classes that are commonly discussed in the context of inflation. Short-duration bond ETFs reprice quickly to keep up with interest rate rises, while inflation-linked bonds ensure investors’ capital value adjusts as CPI increases.
 

3. Use ETFs to access a broader mix of defensive assets

Although investors may have traditionally turned to bonds for portfolio protection, equities and bonds have tended to move together performance-wise in the years since the pandemic. This has prompted investors to look to other defensive exposures as part of their toolkit in times of volatility.  

Investors can access some of these exposures through the expanding range of options available on the Australian ETF market. 

For example, minimum-volatility ETFs aim to reduce ups and downs during market declines, while gold ETFs often move differently from shares and bonds when geopolitical tensions rise. 
 

Key risks [2]

While ETFs can be a useful tool in building a diversified and flexible portfolio, they are not a shield against geopolitical risk. Assets that have historically behaved defensively can still fall in value, particularly during sudden or severe market shocks.  

Geopolitical tensions can also ease more quickly than expected. In such cases, portfolios positioned conservatively may lag if risk assets rebound sharply.  

Even broadly diversified ETFs remain exposed to market cycles, and correlations (relationships) between asset classes can rise during periods of stress.  
 

Conclusion

The extraordinary start to 2026 has shown how quickly geopolitical risks can evolve and shape markets.  

As geopolitical fragmentation accelerates and uncertainty is likely to remain a feature of global markets for some time, a disciplined, diversified approach remains central to navigating markets, with ETFs offering investors practical tools to potentially help position portfolios for resilience over the long term. 

Form ASX

The free online ETFs course is designed for investors who are new to ETFs and want information on their features, benefits and risks. 

------------------------

[1] Disclaimer: Diversification and asset allocation may not fully protect you from market risk.
[2] Disclaimer: Diversification and asset allocation may not fully protect you from market risk.