Geopolitical Risk and Global Markets: Navigating Volatility Through Defensive Assets and Sector Rotation

Geopolitical risk has become an inescapable force shaping global markets, with investors increasingly relying on defensive assets and sector rotation strategies to mitigate volatility. From the 2020-2025 period, data reveals a nuanced landscape where traditional safe havens like gold and bonds have shown both resilience and unexpected vulnerabilities, while emerging assets such as Bitcoin and green bonds are redefining risk management paradigms.

Defensive Assets: Stability Amid Chaos

Gold, long revered as a geopolitical safe haven, has historically delivered strong returns during crises. Between 2020 and 2024, it averaged an 8.98% rise over 12 months following conflicts, with central bank demand in emerging markets pushing prices to a record $2,331 per troy ounce in 2024, according to the World Bank. However, the 2025 Israel-Iran conflict (Operation Rising Lion) exposed a surprising anomaly: gold fell 3.17% as equities surged, suggesting that short-term de-escalation signals or alternative safe-haven assets like Bitcoin may now influence investor behavior, as shown by an InvestorsObserver analysis.

Bonds, particularly Islamic sukuk, have emerged as reliable havens. Unlike the U.S. Dollar Index (DXY), which declined 5.7% during the 2024 Iran-Israel conflict, sukuk maintained stability, underscoring their appeal in diversified portfolios, according to a ScienceDirect study. Meanwhile, Bitcoin's performance has been mixed. While it dropped 43.3% post-Ukraine War, it gained 32.1% during the 2024 Iran-Israel conflict and rose 0.42% in 2025, signaling its growing role as a digital alternative to traditional assets, according to the same InvestorsObserver analysis. Green bonds, meanwhile, have shown medium-term resilience, offering stability as part of climate-conscious portfolios, as documented in a ScienceDirect paper.

Sector Rotation: Adapting to Shifting Dynamics

Sector rotation strategies have proven critical in navigating geopolitical uncertainty. The defense sector, for instance, has thrived on increased government spending, with European defense budgets projected to grow at 6.8% annually through 2035, according to Morningstar. Cybersecurity and advanced technologies have also gained traction as governments prioritize digital infrastructure. Conversely, energy and commodities often experience short-term spikes during conflicts but face corrections as supply normalizes and central banks act to curb inflation, as noted in the ScienceDirect study referenced above.

Consumer goods and utilities have offered relative stability during inflationary periods, while infrastructure and capital goods have led recovery phases when public spending increases. The technology sector, particularly AI, faces unique challenges due to diverging regulations across the U.S., EU, and China, complicating compliance and innovation, according to Sharp Investment Properties.

Strategic Approaches for Investors

To balance safety and growth, investors are adopting hybrid strategies. The barbell strategy, which allocates most capital to safe assets (e.g., government bonds, cash) while reserving a smaller portion for high-risk opportunities, has gained popularity (as highlighted in the Sharp Investment Properties piece cited above). Currency hedging and scenario planning are also essential, as geopolitical events can trigger sharp currency movements and disrupt trade. Diversification across geographies, political systems, and economic structures further reduces exposure to single-point failures, echoing findings from the ScienceDirect paper on green bonds and digital assets.

Conclusion

The interplay between geopolitical risk and market dynamics continues to evolve. While traditional defensive assets like gold and bonds remain relevant, their performance is increasingly influenced by digital alternatives and shifting investor sentiment. Sector rotation strategies, tailored to specific geopolitical triggers, offer a roadmap for capital preservation and growth. As global power dynamics shift, proactive, data-driven approaches will be key to navigating an uncertain future.