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How to hedge your investments against rising geopolitical tensions

by , 30 July 2014

Stock markets across the globe continue in their march higher. A low interest rate environment and stimulus programmes has helped money flow into bourses far and wide.

But as the markets rise, so do geopolitical tensions. There's the situation in Ukraine for one and Israel as examples.

So how can you protect yourself against the potential for situations in certain areas of the world to worsen? And what if it really ends up spooking the markets?

Let's take a closer look…

There’s the potential for global conflict to unhinge the stock markets

Steen Jakobsen, the chief economist at Saxo Bank, says that there’s the potential for rising geopolitical tensions to have a very negative impact on the stock markets.

He says the easiest way to gauge political risk is to look at the price of energy. And in this case, the price of Brent crude oil, Bengt Saelensminde in The Right Side explains.

So why is the price of Brent crude oil so important?

It all comes down to the fact that economies are very dependent on the commodity. And if the crude oil price rose, it could have a detrimental impact on the recovery of the world’s economy.

So far, offsetting any supply issues from the Middle East has been the US increasing its production. But oil is a volatile thing.

If the price of oil soars, this will lead to higher inflation. Higher inflation isn’t good for currencies. And to combat the effect of inflation, central banks hike interest rates.

And if this were to happen, this wouldn’t be good news for economies or the stock markets. The global economy is still very fragile following the financial crisis of 2008.

What can you do to protect yourself against a high oil price?

You do have one option. You can hedge (or insure) yourself against a high oil price. This means if the oil price does shoot higher and affect the stock markets, you can offset your losses against the gains you make from your hedge.

The best thing to do is make sure you have exposure to crude oil. And the easiest way to do that is to put some money into an exchange traded fund backed by it.

In South Africa, there isn’t an ETF on oil, so your next best option is an exchange traded note. These products aren’t for the very long-term though. They expire after ten years.

Standard Bank offer an ETN on oil. Just speak to your stockbroker if you’re thinking about buying into it.

Or if you want to take your money overseas, there are a number of crude oil backed ETFs available to invest in.

So there you have it, how to hedge your investments against rising geopolitical tensions.

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How to hedge your investments against rising geopolitical tensions
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