‘I don’t think it's fair to say that all geopolitical risk is equal because different geopolitical issues call for different asset classes,’ says David Kletz
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The US strikes on Iran jolted markets this past weekend, but the opening-bell moves of the day are already old news. What matters now, according to several investment experts, is duration and whether this conflict reshapes the risk landscape for the longer-term.
Notably, markets have shown a striking ability to absorb geopolitical shocks over recent months, according to investment experts. Even during last year's Israel-Iran 12-day war, the reaction was muted, notes Lorne Gavsie, head of macroeconomic and FX strategy at CI Global Asset Management.
“Here we are now with, I would say, a more severe event. It would certainly seem that way now into day three,” said Gavsie. “The reality is, there was a bit of telegraphing that occurred. The US has been building up their military capacity or capabilities over the past month or two and has been very transparent about it. There's been negotiations that have been going on, again, quite publicly, between Iran and US officials so the events over the weekend shouldn't necessarily take market participants or institutional investors by total surprise. The timing was an uncertainty. The tactics were definitely an unknown. The degree to which they would move forward. Again, an unknown.”
Gavsie notes that the current shock was foreshadowed in markets noting that oil prices had been grinding higher for weeks, with a clear geopolitical risk premium already embedded by Friday. He also acknowledged that institutional investors dedicate significant effort to assessing this kind of risk, but the critical issues are always the same. Particularly, how severe the event will be, how long it will last, and whether to position pre‑emptively or wait and react once events unfold.
According to David Kletz, lead portfolio manager at Forstrong Asset Management, markets can absorb a surprising amount of volatility at this point, largely because investors have grown numb to the constant drumbeat of geopolitical shocks.
He draws a comparison to the first Trump term, when markets swung on every social media post. The second term has arguably been more provocative, pointing to Venezuela and now Iran. Yet the reaction has been more muted, noting the morning's asset class moves in response to the Iran strikes were notable but far from historic.
"Whether it's a good thing or bad thing, markets are adaptable and have just become numb and more accustomed to the geopolitics and the nature of a Trump presidency, ultimately," he said.
Kletz believes the more durable response is to focus on long‑run shifts like fracturing globalisation and the move away from hyper‑integrated supply chains. That implies building domestic inventories of critical minerals and tilting portfolios toward raw materials and strategically important commodities.
Additionally, Kletz underscored that not all geopolitical risks are alike, and different episodes demand different tools.
"There's just not a huge toolkit. I don't think it's necessarily fair to say that all geopolitical risk is equal because different geopolitical issues call for different asset classes. Whether it be precious metals or industrial metals, that’s probably more interesting because there's other drivers to it, besides just geopolitical risk,” said Kletz. “There's also demand, particularly for the industrial metals, from AI data centers, from electrification initiatives, EVs. That's very multi-faceted, so finding some common denominators amid the geopolitical factor has been a winning strategy for us.”
Meanwhile, traditional safe havens have been disappointing, noted Kletz, adding gold was bought as a structural hedge but surged so sharply it became one of the portfolio's most volatile holdings. The US dollar has also weakened despite global frictions, while long-dated Treasuries have underperformed, and the yen sits at depressed levels.
To that end, Gavsie warns that if elevated oil prices persist beyond a month or so, both Canada and the global economy face a supply-side inflation problem that central banks are poorly equipped to fight. Interest rate policy can address demand-driven inflation, but it doesn't have the same effect on supply shocks.
He argues that the macro story is essentially the same for Canada as for the rest of the world: if oil stays elevated for more than a few weeks, the risk shifts from short-term noise to a genuine supply‑side shock.
At that point, constrained oil supply pushes inflation higher, and that’s a problem monetary policy is poorly designed to fix. Rate hikes can cool demand, but they don’t resolve a physical shortage of energy, so the inflation growth trade-off becomes much harsher.
He stressed this isn’t his central forecast, but he believes markets are already starting to price in the possibility, and that risk premium could keep building if the conflict persists.
Meanwhile, Kletz argues that Canada is no longer as tightly tied to energy prices as it once was, largely because the TSX is now led by materials rather than energy, thanks in part to a powerful gold rally and the index’s heavy weighting in gold mines. Even so, higher oil prices still tend to support the broader Canadian economy and clearly boost the profitability of the energy sector, making the overall impact positive for corporates.
He stressed, however, that this comes with meaningful trade-offs. Canadian households are highly indebted, and the housing market looks exposed. If energy-driven price increases feed into headline inflation and the cost of living, that pressure lands on consumers, strains bank lending dynamics and adds risk to housing.
In his view, elevated energy prices are a net benefit for corporate Canada, but they simultaneously increase macro and financial vulnerability on the household side.
From a Canadian perspective, Gavsie sees a clear double edge. As an oil producer and energy exporter, Canada gets some protection: stronger prices support producers and offer a partial cushion for the wider economy.
But if the Middle East conflict drags on and Iran is able to sustain military pressure longer than expected, the resulting rise in energy prices ultimately hurts Canadian and global consumers, lifts inflation, and weighs on growth, he noted.
“There are two sides of that coin. It helps the producers, clearly but it certainly isn’t a net positive overall for Canada or the global economy,” said Gavsie.
