The reaching impact of geopolitical tensions – ranging from economic sanctions, trade disruptions or armed conflicts – can be compared to a game of Whac-A-Mole, according to Liberium investment strategist Joachim Clement.

For domestic investors, this means a constant challenge to determine how, not if, they will affect their portfolios.

“You think you’re not affected by it at all, especially if you’re on the sunny Australian side of the planet. But we can’t escape it, no matter where we are,” Clement said on a recent Fidante podcast.

"Know that geopolitical risks, if they're big enough, can have a really significant impact around the world, even if your region isn't even affected by them."

However, Clement also cautioned against being too sensitive to any wave of tension felt in the markets, saying, “that's something you have to learn as an investor; to ignore these kind of short-term effects and be able to distinguish when it really matters'.

Earlier this year, the Australian Sovereign Investment Fund noted that geopolitics will have a profound impact on financial markets, macroeconomics and policy decisions. In its latest position paper, Future Fund said this new landscape means a more volatile, challenging and complex long-term investment environment where predictable returns will be harder to earn, necessitating a re-evaluation of strategies.

Speaking to InvestorDaily, Brad Partridge, portfolio manager at Tura Capital, suggested that a consistent framework for valuing companies across industries could help investors "separate the hype from the reality" as geopolitical risks escalate.

"A deep, fundamental understanding of a company's earnings drivers is critical to assessing whether geopolitical developments will have lasting impacts," Partridge said.

"We believe that in the longer term, the only geopolitical events that matter are those that impact the company's earnings." Long-term investors should focus on changes in industry structure, a company's competitive advantages and earnings volatility caused by geopolitical events.

Partridge notes that exposure to commodity products such as steel, car batteries and solar panels is particularly vulnerable to being significantly affected, as protectionist trade policies can distort industry structures and erode competitive advantages.

"When geopolitical risks rise, companies with limited competitive advantages in commercialized industries may see a significant reduction in earnings," he said.

Meanwhile, ClearBridge Investments said it is keeping a pulse on events that could change the movement of physical commodities, including disruptions to supply chains, the flow of energy - particularly oil and natural gas - and food products.

"This can affect commodity prices, both positively and negatively, which will impact inflation and potentially monetary and fiscal policy in different countries or regions," Nick Langley, portfolio manager at ClearBridge, told InvestorDaily.

Sanctions against Russia following the invasion of Ukraine, Langley continued, also demonstrate the risk of stranded assets and capital following a geopolitical event, highlighting the potential for capital controls or restrictions.

"In the long term, we're likely to see different global frameworks and that's where investors need to spend time and effort to understand the implications for asset allocation," he said.

“Investors should be aware of strategic versus tactical allocations or positions in their portfolios. It requires a level of risk management and clear investment time horizons, and they look at the investment thesis associated with the position,” Langley said.

A three-step guide to assessing portfolio risk

Broadly speaking, Liberium's Klement outlined a three-step approach to assessing the health of investment portfolios when faced with geopolitical tensions.

"If I look at my investments, I know that the valuation of those investments is driven by the present value of future cash flows," Clement said.

The first consideration is whether a given geopolitical risk is likely to have an impact on inflation that spans more than 12 months.

"If so, I have to factor that into my inflation numbers and as a result it changes my discount rate and maybe the rate at which I grow my income." This has a significant impact on my investments and I can adjust my investment portfolio accordingly,” said Clement.

The second, he said, is whether the risk could have an impact on future growth, adding that the pendulum is capable of swinging to both a positive and a negative impact. Free trade agreements, for example, can benefit export-oriented companies and global trade, although Klement acknowledged that most conflicts tend to hinder growth by increasing costs or restricting trade.

“We in the UK have had that experience over the last eight years with Brexit, when we decided to reduce our ability to trade with our nearest neighbours. The resulting negative effects are also reflected in these assets,” he said.

If neither of those two considerations are present, Clement said the third element is the effect of mood.

"Here, geopolitics is very cynical. Most geopolitical events don't really matter to investment portfolios,” he said.

The investment chief pointed to the ongoing conflict in Gaza as an example, noting that despite the humanitarian crisis, capital markets – including Israel's – have remained largely unaffected.

"The end result is that people get scared, risk premiums go up, stock markets go down, bond markets go up, but within a month or two everything is back to normal," Clement said.

Emmanuel Datt, chief investment officer of Datt Capital, agreed that many geopolitical risks will eventually leave markets free to recover.

"While initial market reactions may be negative, historical data shows that markets often recover, so understanding the potential for long-term economic impacts is critical," Dutt said.

Using indicators such as geopolitical risk indices and economic indicators, he explained, can also help gauge market sentiment and potential spikes in volatility, helping to distinguish between transitory and permanent impacts.

"Assessing how specific sectors are affected can indicate whether the impacts are likely to be short-lived or have lasting economic consequences," Dutt said.