Geopolitical risk: what to focus on when picking stocks
Things like conflict, tariffs and political events are almost impossible to predict, and many investors spend too long worrying about them. Analyst Robert Stephens offers some sensible tips on how to cut through the noise.
3rd February 2026 09:26
by Robert Stephens from interactive investor
War, tariffs and political uncertainty have dominated news headlines over recent months. Indeed, geopolitical risks have been elevated for a prolonged period of time and there has been an inevitable impact on investor sentiment and share prices.
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Notably, conflicts in Ukraine and the Middle East have prompted periodic caution among investors over recent years, while the imposition of tariffs by the US on its major trading partners led to a market crash in April last year. Meanwhile, seemingly perpetual political uncertainty in the UK and elsewhere is unlikely to have boosted investor sentiment towards the stock market.
In the short run, geopolitical risks could remain elevated. They may even grow in size and scale over the coming months, with there being the potential for further conflict in the Middle East, for example, while the full impact of tariffs on the global economy’s performance has arguably not yet been felt. And with the potential for a Labour Party leadership challenge later this year following the upcoming local government elections, the outlook for the stock market could remain precarious for an extended period of time.
Omnipresent risks
While stock market investors will inevitably keep abreast of such developments, given their prominence in the media, allowing geopolitical risks to influence investment-related decisions could be a mistake.
After all, they are, by definition, wholly unforecastable. Investors have no idea whether specific conflicts will end, tariffs will be implemented or if the party in government will change. Even if such outcomes are successfully predicted, accurately estimating their exact timing, as well as their full impact on the stock market, is impossible.
Furthermore, the current period of elevated geopolitical risks and resulting heightened stock market volatility is not an anomaly. Such threats have always been present, alongside economic and countless other risks, and have at times led to significant share price volatility in the past. Indeed, there have been trade wars, conflicts and political uncertainty in previous years that have caused severe short-term declines in investor sentiment. Yet the stock market has always recovered from them to ultimately reach new record highs.
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Indeed, the FTSE 100 index has posted a total annualised return of over 8% since its inception in 1984. And despite the presence of elevated geopolitical risks over recent months, it still currently trades within 1% of an all-time high.
Focusing on fundamentals
Rather than spending time trying to predict what are inherently unforecastable geopolitical risks or, indeed, worry about their possible effects on the stock market, it is far more logical for investors to focus on company fundamentals.
After all, companies that are financially sound and have a competitive advantage, such as customer loyalty or higher profit margins than their peers, are likely to be more capable of overcoming the economic effects of tariffs, conflict and political uncertainty. Furthermore, they may also be better equipped to produce strong revenue and profit growth in any subsequent period of relative stability and economic growth.
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Similarly, stocks that trade below their intrinsic value may be less affected by elevated stock market volatility caused by heightened geopolitical risks. A margin of safety may mean their market valuation does not fall to the same extent vis-à-vis a heavily overvalued stock, for instance. As such, spending time ensuring that portfolio holdings only contain companies with earnings multiples which accurately reflect their growth potential could be a sound move.
So, too, is focusing on portfolio management. Ensuring that a portfolio is diversified across various sectors and that it contains a sufficiently large number of holdings, for example, means that the overall effect of raised geopolitical risks on one industry or business is likely to be far more limited.
A sound business
Company | Sector | Price | Market cap (m) | One month (%) | One year (%) | Dividend yield (%) | PE ratio |
Reckitt Benckiser | Personal Care, Drug and Grocery Stores | 6,079p | £40,828 | 1.1 | 14.0 | 3.4 | 17.2 |
Source: ShareScope on 30 January 2026. Past performance is not a guide to future performance.
In terms of individual stocks, global consumer goods company Reckitt Benckiser Group (LSE:RKT) appears to be a fundamentally sound business that is well placed to overcome ongoing raised geopolitical risks. The FTSE 100 member has a strong competitive position, largely through its portfolio of household and healthcare brands such as Finish, Dettol and Nurofen, that means its financial performance could prove to be relatively resilient over the long run.
Furthermore, it has a relatively solid financial position. Although its net debt-to-equity ratio stood at 131% at the time of its half-year results last June, its net interest payments were covered over eight times by operating profits during the six-month period. Given that the company expects to deliver a 4-5% annual rise in like-for-like net revenue within its core business over the medium term, as well as profit margin improvements resulting from cost reductions, its net interest cover could realistically improve over the coming years.
Growth potential
Reckitt is in the midst of a period of significant change. It recently completed the divestment of its Essential Home business, with the company maintaining a 30% stake. This should result in a leaner business that offers superior long-term growth potential due to it focusing on stronger brands with greater scope to expand.
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Proceeds from the divestment, totalling £1.6 billion, are set to be returned to shareholders via a special dividend alongside a 24 for 25 share consolidation. Separately, the company is continuing to implement its £1 billion share buyback programme, with it being roughly 50% complete. This should support future earnings per share readings, while the company’s profitability is also likely to be catalysed by the full effects of monetary policy easing, and moderating inflation on consumer spending across several developed economies and key markets like the US and eurozone.
Trading on a price/earnings (PE) ratio of 17, Reckitt shares appear to offer good value for money given its long-term growth potential. Although its shares are by no means immune from the effects of elevated geopolitical risks, an attractive valuation, when combined with its sound financial position and competitive advantage, suggest the company offers long-term investment appeal.
Earnings growth
Company | Sector | Price | Market cap (m) | One month (%) | One year (%) | Dividend yield (%) | PE ratio |
Sage | Software & Computer Services | 964.3p | £9,053 | -11.0 | -27.4 | 2.3 | 22.5 |
Source: ShareScope on 30 January 2026. Past performance is not a guide to future performance.
Fellow FTSE 100 member Sage Group (The) (LSE:SGE) also appears to have solid fundamentals. The provider of accounting and payroll solutions to small and medium-sized firms covered its net interest payments 11.5 times in its most recent financial year.
It also has a sound competitive position, with its services often being an integral part of its customer’s operations. This means switching costs can be relatively high, thereby providing a significant amount of customer loyalty. In turn, this equates to pricing power and a relatively consistent financial performance. Additionally, around 97% of its revenues are recurring, which can lead to more predictable financial prospects.
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Indeed, the firm’s bottom line has risen at an annualised rate of 19% over the past three years despite ongoing elevated geopolitical risks. Over the next two financial years, its earnings are currently forecast to rise at an annualised rate of 15%, which is likely to be ahead of the wider FTSE 100 index’s growth rate over the same period.
Risk/reward
Despite this, Sage’s share price has slumped by 27% in the past year. Investors have apparently become increasingly concerned about the potential negative impact of artificial intelligence (AI) on demand for its services. However, with the company integrating AI into its products and being well placed to cross-sell updated services to existing customers, while potentially benefiting from the eventual impact of interest rate cuts across several developed economies, it appears to have an upbeat long-term outlook.
With an earnings multiple of 22.5, the stock is relatively expensive. Furthermore, its share price could remain volatile in the short run amid elevated geopolitical risks. But with a strong earnings growth track record and outlook, as well as solid fundamentals, it appears to have a favourable risk/reward ratio on a long-term view.
Robert Stephens is a freelance contributor and not a direct employee of interactive investor.
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