Hedging Investment Portfolios Against Major Military Conflicts


Investors often face considerable risks during major military conflicts, as such events can lead to market volatility, economic instability, and geopolitical uncertainty. Hedging against these risks is a critical strategy to protect investment portfolios. This report explores the methods investors typically employ to hedge their portfolios against the financial impact of major military conflicts, referencing historical conflicts such as World War II, the Gulf Wars, and Russia's invasion of Ukraine. Additionally, it examines how stock markets tend to rebound following the emergence of conflicts.

Understanding Market Reactions to Military Conflicts

Historically, military conflicts have triggered immediate market reactions characterised by increased volatility and uncertainty. For instance, during the onset of the Gulf War in 1990, global markets experienced significant turmoil. The S&P 500 dropped by approximately 13% between July and October 1990, reflecting investor anxiety over potential economic repercussions and oil supply disruptions. Similarly, Russia's invasion of Ukraine in 2022 led to a sharp decline in global stock markets, with the S&P 500 falling nearly 10% in the weeks following the invasion.

Hedging Strategies

Investors use a variety of hedging strategies to mitigate risks associated with military conflicts. These strategies include diversification, allocation to defensive assets, the use of derivatives, and investment in commodities such as gold.


Diversification is a fundamental risk management strategy where investors spread their investments across different asset classes, sectors, and geographies. The rationale is that a diversified portfolio is less likely to suffer significant losses from any single event. During World War II, for example, while many industries suffered due to wartime disruptions, sectors like manufacturing and technology (focused on wartime production) thrived, providing a buffer to diversified portfolios.

Defensive Assets

Defensive assets are investments that tend to retain value or even appreciate during times of economic uncertainty. These include government bonds, utility stocks, and consumer staples. For instance, during the Gulf War, investors flocked to U.S. Treasury bonds, which are considered safe havens. This shift was evident as bond prices rose and yields fell, reflecting increased demand for these low-risk assets. Similarly, during Russia's invasion of Ukraine, there was a notable increase in the purchase of defensive stocks and bonds as investors sought to shield their portfolios from the turmoil.

Commodities and Gold

Gold has long been regarded as a safe-haven asset during times of conflict and economic distress. Its value typically rises when investors seek refuge from volatile markets. During the early stages of World War II, the price of gold surged as investors sought to protect their wealth against the uncertainties of war. A similar pattern was observed during the Gulf Wars and the recent conflict in Ukraine, where gold prices spiked amidst the geopolitical tension.

Other commodities, such as oil, can also serve as a hedge. However, their effectiveness can be more variable, as conflicts often directly impact their supply and prices. The Gulf Wars are prime examples, where oil prices initially soared due to fears of supply disruptions in the Middle East, highlighting both the potential and the risks associated with commodities as hedging tools.


Derivatives, such as options and futures, allow investors to hedge against potential losses by locking in prices or securing the right to sell assets at predetermined prices. During times of conflict, these instruments can be particularly valuable. For instance, options can provide insurance against severe market downturns, while futures contracts can hedge against volatile commodity prices. During the 2003 Iraq invasion, many investors used oil futures to hedge against expected increases in oil prices due to the conflict.

Case Studies

World War II

During World War II, the stock market experienced significant volatility. However, investors who diversified their portfolios and invested in war-related industries often saw substantial returns. Companies involved in manufacturing, technology, and raw materials production generally performed well, offsetting losses in other sectors. Additionally, the war effort led to increased government spending, which benefited sectors closely tied to government contracts.

Gulf Wars

The Gulf Wars had immediate and significant impacts on global markets, particularly due to the Middle East's crucial role in oil production. In the 1990-1991 Gulf War, the initial invasion caused oil prices to spike, leading to broader market instability. Investors who had hedged their portfolios with energy stocks or commodities like oil saw less pronounced losses. Similarly, the 2003 Iraq War led to increased demand for safe-haven assets like gold and U.S. Treasuries, which provided stability amidst the market turmoil.

Russia's Invasion of Ukraine

The 2022 invasion of Ukraine by Russia caused widespread market disruptions, particularly in Europe. Energy prices soared due to fears of supply disruptions, and investors quickly moved towards safe-haven assets. Gold prices increased, and there was a notable shift towards U.S. Treasury bonds and other low-risk securities. Additionally, sectors such as defence and cybersecurity saw increased investor interest as the conflict underscored the importance of security-related industries.

Market Rebounds Post-Conflict

While military conflicts initially trigger market volatility and declines, historical data shows that stock markets often rebound once the uncertainty diminishes and the outcomes of the conflict become clearer.

World War II

Following the initial shock of World War II, the U.S. stock market rebounded significantly. By the end of the war in 1945, the Dow Jones Industrial Average had increased by nearly 50% from its 1939 level. The post-war economic boom, driven by reconstruction efforts and technological advancements, contributed to sustained market growth in the following years.

Gulf Wars

The market reaction to the Gulf Wars also demonstrates the resilience of stock markets. After the initial downturn during the 1990-1991 Gulf War, the S&P 500 recovered rapidly, rising by more than 20% in the year following the end of the conflict. The resolution of uncertainty and the relatively swift conclusion of the war helped restore investor confidence.

Russia's Invasion of Ukraine

The market response to Russia's invasion of Ukraine in 2022 also highlights a pattern of recovery. Despite the initial drop, global markets began to stabilise as investors adjusted to the new geopolitical landscape. By mid-2023, many stock indices had recovered, reflecting a return of investor confidence and adaptation to the ongoing situation.


Hedging investment portfolios against major military conflicts involves a combination of strategies aimed at reducing risk and preserving capital. Diversification, allocation to defensive assets, investment in commodities like gold, and the use of derivatives are key tactics employed by investors. Historical conflicts, including World War II, the Gulf Wars, and Russia's invasion of Ukraine, provide valuable lessons on how these strategies can mitigate losses and, in some cases, even lead to gains during tumultuous periods. Furthermore, while conflicts cause immediate market disruptions, stock markets tend to rebound as uncertainty clears and economic conditions stabilise. Understanding and implementing effective hedging strategies remain crucial for investors seeking to safeguard their portfolios amidst geopolitical risks.


Gulf War (1990-1991):

"The Economic Consequences of the Gulf War" by George Perry, Brookings Papers on Economic Activity, 1991.

World War II:

"Stock Returns and World War II" by C. F. Rouwenhorst, Yale School of Management.

Russia's Invasion of Ukraine (2022):

Economic spillovers from the war in Ukraine: The proximity penalty: VoxEU column by Victor Sehn, Andre Meier, Gernot Müller and Jonathan Federle.

Defensive Assets and Gold:

Is Gold a Safe Haven? International Evidence”, Dirk G. Baur, University of Western Australia - Business School; Financial Research Network (FIRN) and Thomas K. J. McDermott, University of Galway

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