Here are 5 things worried investors can do as the Iran war plays out

Traders work on the floor of the New York Stock Exchange on March 2 in New York City. Photo by Spencer Platt/Getty Images files

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This week with the launch of the Iran war we have seen very high volatility and investors, rightly so, are scared.

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We at 5i Research of course do not condone war. But being financial guys we always need to consider the effects of world events on investors and how current events might influence portfolios. Let’s then look at some strategies on how investors can position their portfolios to brace for yet another conflict in the world.

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Buy the fear

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We like contrarian investing. We do not rub our hands in glee in downturns but we watch the VIX volatility index very closely. When investors panic we will often start buying. It has proven to be a good strategy, since every market downturn has ended at some point. Unfortunately (or not, for investors), wars have largely been good for the stock market. Other than the Second World War, when U.S. markets fell three years in a row from 1939 to 1941, stock market reactions to wars have been remarkably muted. Even in the Second World War, though, the U.S. market (as measured by the Dow Jones) still managed to go up. After declining in the first three years of the war, the U.S. market went up for four years straight (1942 to 1945) and for the full period of 1939 to 1945 the Dow was up 28 per cent.

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The defence sector

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The defence sector of course was already solid even before the Iran conflict. Dozens of countries have vowed to increase defence spending, and the sector has surged. The defence sector ETF of iShares U.S. Aerospace & Defense (ITA) hit a new high on Monday, and is up about 61 per cent in the past year. In Europe, the Select STOXX Europe Aerospace & Defense ETF (EUAD) is up about 32 per cent in the past year. The current conflict again highlights the need for countries to arm themselves and investors may want to look at this sector at least as a hedge against market volatility.

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Buy defensive sector stocks

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In contrast to defence, if the war causes inflation to surge and markets to wobble further, investors may want to look at sectors that have more inherent stability and may be less vulnerable to recession. Typically these are utilities, healthcare and consumer staples. In the S&P 500, these sectors have seen returns of about 10 per cent, one per cent, and thirteen per cent, respectively. All three sectors are beating the S&P 500 index this year, and on average are massively ahead of its decline of about half a per cent. Defensive stocks are not risk free — they are still stocks, after all — but they have shown that in times of market stress their stable revenue and consistent cash flow are valued by investors worried about wars. After all, as they say, worried investors still gotta eat.

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Energy

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Oil of course is always a strategic asset during times of war. In the current conflict, the threat of the Strait of Hormuz closing has resulted in a big spike in oil prices. The energy sector was already doing well before this war started but has picked up steam since then. The TSX energy sector is already up about 22 per cent this year. Its year-to-date performance would already put it into the top ten annual returns from the sector for the past 25 years. For many investors, selling their energy stocks into a “war price spike” is often their automatic plan. This cycle might be different, though, as energy sector stocks remain cheap versus historical valuations even after this year’s gains.