How to build portfolio inflation resilience during geopolitical uncertainty?

Recent geopolitical events sent a shock through markets. Are portfolios resilient enough? Luke Hyde-Smith, Co-Head of Multi-Asset at W1M, explores the challenges and potential diversification strategies.

Key discussion points include:

• Inflation risks: Geopolitical events, such as Middle Eastern conflicts, drive inflation through rising energy costs and commodity prices.
• Portfolio diversification: Traditional 60/40 portfolios lack resilience; real assets and commodities offer inflation protection and diversification benefits.
• Gold and commodities: Gold remains attractive for inflation resilience and currency hedge; broader commodity cycles show structural demand drivers like electrification and nuclear power.
• Investment opportunities: Underinvestment in mining creates long-term opportunities in copper, uranium, and AI-driven demand for raw materials.
• Real asset strategy: Focuses on sustainable, unique assets with pricing power, predictable revenue streams, and long-term compounding potential.

Introduction: Examining significant geopolitical shocks

With a broadening Middle Eastern conflict, markets naturally think about inflation risks. Portfolios need to be properly diversified and intentionally mitigating volatility and delivering inflation resilience. Inflation had a post-pandemic resurgence, after the invasion of Ukraine in 2022 impacted energy and food prices globally. It had been moderating and bond markets have been expecting one or two US and UK interest rate cuts this year, however, the latest geopolitical shock to markets is potentially inflationary.

Oil prices had been falling and supportive of growth recently, but have now jumped and, at around $100 (WTI), up over 60% year-to-date, in conjunction with natural gas prices rising with prices up more than 50% compared to a month ago, with resulting upward pressure on energy costs in due course.

Portfolio diversification strategies under geopolitical pressure

Inflation is a risk for both bonds and equities; this points to the need for greater diversification. Bonds can fall with equities if inflation and interest rates rise. A traditional 60/40 portfolio is not offering the 'natural' diversification it once did.

Source: Bloomberg, W1M. Data as at 31^st December 2025.

Diversification is always important. The whole point of being diversified is that when some asset classes are negatively impacted, say by greater inflation risk putting upward pressure on interest rates, other assets can be uncorrelated and go up.

If bonds (fixed income) are negatively impacted by inflation eroding the value of annual payments and fall in price when rates go up, it is a benefit to portfolios if asset classes, such as commodities and real assets are included to give resilience. If equities are negatively impacted by interest rates facing greater inflation risks because growth becomes more challenged, it is important for portfolios to be proactive in mitigating volatility.

If energy and other production costs rise, miners of gold, for example, have to seek higher prices or make a loss. This is the basic mechanism which should give real assets inflation resilience if producers are rational. Supply should reduce ultimately if production is loss making. In addition to this inflation resilience quality, investors also value diversification away from fiat currency debasement.

Gold has been rising, but so has the stock market…is it expensive?

Gold price per troy ounce relative to S&P500 Index price - 1971 – current monthly

Source: Bloomberg, W1M. As at 31.01.26

Gold has had a strong run but the chart above shows that it is not necessarily “expensive” relative to equities.

Given huge potential demand for, inter alia, copper (electrification of transport and manufacturing) and uranium (nuclear power), we see a broader commodity cycle which is not necessarily peaking. With global growth appearing resilient, despite geopolitical shocks, there are longer term, structural demand-drivers for commodities.

Opportunities and challenges in commodities

Long term commodity cycle showing signs of recovery

U.S. Commodity Price Index (Data 1795 to Present) with Major Inflation Peaks (Red Dots) & Major Inflation Troughs (Orange Dots)

The resources sector seems somewhat overlooked and provides some very attractively priced long-term opportunities whether in copper miners or the resurgent nuclear industry.

Gold has had more attention recently but still is interesting in our view given its inflation resilience and as a hedge against currency debasement. However, the market cap of the mining sector has declined as a percentage of global market cap, yet many of the raw materials produced are vital to a functioning global economy and its technological development. Years of underinvestment in the mining sector creates opportunities for investors who see companies now facing greatly increased demand to meet current metals demand, let alone the surge expected from AI development, defence modernisation, and advanced manufacturing.

The W1M Real Asset strategy looks for ‘unique assets” which exhibit sustainability combined with a long-term competitive advantage plus predictable revenue streams and growth potential. Growth doesn't necessarily have to come from volume; pricing power can significantly enhance profitability. The investment merit in real assets is not short-term ‘growth’ but in the long-term compounding of earnings over time.

Investments can be negatively impacted by regulation or over-leveraged strategies, but if correctly managed and operated, inflation linked, contracted revenues are a powerful long-term tailwind to earnings, cash flow and thus dividends.

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