How to invest in times of turmoil

From ongoing conflicts to tariffs, global tensions and disputes only seem to be on the rise. And while this presents major humanitarian issues, it’s also something investors are seeking to navigate.

What does a world of heightened tensions mean for portfolios? We look at what it means for different asset classes, regions and investment styles, with the help of our guest, investment veteran Peter Dalgliesh.

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Dave Baxter, senior fund content specialist at interactive investor: Hello, and welcome back to the On the Money podcast.

I’m Dave Baxter and I’m back on hosting duties this week. Today, I’m joined by Peter Dalgliesh. He has a wealth of experience in the investment space, most recently in his former role as chief investment officer at Parmenion.

Peter, thank you very much for joining me today.

Peter Dalgliesh: Thank you for having me.

Dave Baxter: We’re tackling a pretty weighty subject this week. I want to talk about investing in times of turmoil. So, that’s nothing to do with, for example, the latest AI-related sell-off. It’s about the very serious issue of mounting geopolitical tensions that we’ve seen in recent years.

Of course, so far this year, just a few weeks since 2026 began, we’ve seen more ramping up. To give a few examples, the US intervention in Venezuela, fresh threats of trade tariffs, sabre-rattling over Greenland, tensions between US and Iran, ongoing conflicts, of course, in places like Ukraine and so on. This, of course, is a major humanitarian issue, a big issue in its own right. But like everything else, investors do also need to try to navigate it. So, we’re going to tackle that today.

Before we started recording, you outlined some interesting trends, I suppose, in the direction of travel that you’ve seen in recent years. I wondered if you could, to kick us off, touch on some of the most pertinent developments and what that means in terms of the sectors and areas that are becoming increasingly relevant to investors.

Peter Dalgliesh: Sure. I suppose that a key notable callout that was made even in Davos, obviously, by Mark Carney, the prime minister of Canada, was that we’ve gone from this environment of quite a ‘rules-based orderly environment’ to a disorderly one.

Now, other commentators would go stronger than that and say that, actually, we have a US president that deliberately thrives and wants to instigate chaos.

Regardless of how you interpret it, from an investment point of view, that is a material shift, which I think investors are beginning to adjust to and consider in how they build portfolios.

Specifically, that relates to the other element, which is what investors have fantastically ridden and enjoy is a phenomenal success in investing in US assets collectively in the round.

But at a point in time when those expectations now are pretty elevated, and valuations, - I think you could at best describe them as full - means that the risk/reward trade-off is more finely balanced. Let’s just put it politically correctly like that.

So what I think is evident throughout ‘25, and we’ve begun to see it in the first five weeks of this year, is that this desire for diversification is beginning to manifest itself in performance, relative performance terms. So, obviously, ex-US led returns in 2025. So far in 2026, that has continued to be the case.

But that we’re also beginning to see some meaningful shifts within the factors that have been driving that performance. And it’s very noticeable in 2026 so far, and we’re only five weeks in, but that, actually, you can wind it back and you can see that trend beginning to unfold through the fourth quarter of last year as well.

That I think is giving us the heads-up that there’s some longevity to this and that the need for a balanced approach from a geographical asset allocation point of view, as well as from a factor style point of view, is increasingly beginning to be incorporated by investors, whether from an institutional point of view or whether from a retail point of view. It’s beginning to, I think, really show and shine forth.

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Dave Baxter: So, there’s a lot to unpack there, but let’s first touch on the style points. Investment style has always had  quite a big bearing on returns. I suppose in recent years, we’ve seen value has had this very powerful resurgence. But in this era of heightened tension, heightened uncertainty, what kind of styles could potentially come to the fore? What might you want to, so to speak, keep in your back pocket as an investor?

Peter Dalgliesh: So, the other element of this shift to disorder is also an abundant callout, deliberately and explicitly, I hasten to add, of increased self-dependency. We can stick that under the umbrella of nationalism. That, I think, is beginning to really feed into the psyche of our politicians, and with it comes risks as well as opportunities.

On the opportunity side of this, I think there are two elements to your point, which is that from a factor point of view, I think that large-cap growth, which has driven investor returns, arguably since 2016 when it really took off - which happened to coincide with Brexit, but I don’t think Brexit was the catalyst for that - this has meant that the valuation disparity between large-cap growth versus small caps, whether that’s growth or whether it’s value, but it’s particularly clear in mid and small-cap value, is giving investors that opportunity to hit two birds with one stone by leaning into the nationalism element, whereby mid and small caps tend to have a more domestic-oriented bias to them, as well as being able to tap into lower valuations, and therefore the risk of a drawdown is less. It’s not removed, but it is marginally less.

Dave Baxter: How much weight would you put behind small caps? Because that tends to be, in a portfolio, more of a satellite position. People, of course, have different opinions on what satellite means, but perhaps a single position wouldn’t account for more than 5%. But would you view small caps as something that needs to be much more prominent in portfolios going forward?

Peter Dalgliesh: I think it comes back to that point around balance. No, you cannot take your eye off the ball in terms of ensuring that your risk of the portfolio in total is not suddenly being extended at a point in time when I could argue there are signs that we’re moving more late cycle. That would be, arguably, an irrational approach or certainly something that you want to be careful about.

So, I think having that keen eye on how much risk you are carrying within your portfolio remains as important as ever.

Where I think there are some subtleties to all this, which is important to bear in mind, is that there is $130 trillion (£96 trillion invested in the US in capital markets as a whole.

If we work on the basis of a 60/40 portfolio, 60% in equities, 40% in bonds or bonds alternatives, that implies roughly just shy of $80 trillion into equities at a point in time when most investors, but specifically the US investor, have only 11% of their equity exposure overseas.

If we worked on a global GDP pie chart, you would be concluding that they have got an excessive domestic bias. International investors similarly have a US over-indexation is often how it’s referred to and described. If half a per cent of that $78 trillion were to be reallocated, for example, to the UK, and the UK has a market capitalisation of just shy of £2.5 trillion, that translates into roughly 15% uplift in the UK market.

That, I think, has a significant potential of a relatively small amount of capital reallocation that can provide some rerating opportunity as well as some ballast were we to go into an environment of risk-off.

So, to your question, are we in a position to realistically reallocate from large-cap growth into small caps? The simple answer to that is no. But at the margin, were an allocation rebalance to be undertaken, that can still have a meaningful impact.

Dave Baxter: So, some kind of moderate allocation there.

I wanted to return to some broader trends we’re seeing in this period of greater uncertainty. You mentioned a couple of interesting talking points before we started recording.

To kick off with one, let’s talk about currencies. For those who don’t know, if you’re in a period of market stress, uncertainty, and so on, historically, we’ve tended to view the US dollar and the Japanese yen as safe havens. So, assets there can end up getting a boost, and if you hold said assets, that can offset some of the drops you might see elsewhere in your portfolio. Do you now see a shift in that dynamic?

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Peter Dalgliesh: I do have cautions around the US dollar for all the reasons that we’ve touched on. I think that international investors are over-indexed to the US, and when I layer that with purchasing power parity, so conventional theory around FX fair value, then the US dollar remains modestly overvalued.

I think those two factors combined makes me a little bit hesitant around assuming along the lines of what you just described, which is in a risk-off environment, the dollar appreciates, US treasuries rally, and gold would probably typically do likewise. But what we’ve seen in a number of these geopolitical incidents, crises, is actually the reverse has occurred, which is that the dollar hasn’t strengthened. If anything, it’s experienced some weakness. 

The treasuries haven’t offered that ballast. I think there are a variety of reasons around those which we haven’t touched on yet, which is one of my two bugbears. I think there’s been a complete inversion between the developed-market status of good management, careful governance and emerging markets.

Dave Baxter: So, you’re talking in relation to government bonds...

Peter Dalgliesh: Yes. But why is it so important is because the outstanding debt in developed markets, you’ll struggle to find, with the exception of Germany, a developed market with a debt to GDP ratio of less than a 100% now.

By contrast, the emerging market countries, yes, you will find some exceptions, but for the core larger emerging markets, they have debt to GDP ratios of around 50% to 85%. So, that seesaw has completely inverted at a point in time when I think the domestic funding capability with an emerging market is becoming ever more apparent.

What I think that means is that the volatility in emerging markets has scope for being dialled down. Meanwhile, I think the risk premium in specifically developed markets and specifically when it comes to those sources of safe havens, so US treasuries and the US dollar, looks more questionable.

Dave Baxter: So, are you then saying that emerging market debt, which is generally perceived as being riskier bonds, could that become more stable? You mentioned US government bonds, treasuries, but also gilts or UK government bonds have had quite a volatile few years. We had the mini-Budget back in 2022, and so on. Do you think those are tipped to be more unpredictable, more volatile in the future?

Peter Dalgliesh: I think volatility, to your point, in those developed market bonds has scope to increase. In contrast, I think the volatility in emerging market debt, over the medium to long term, there’s real justifiable reasons why that can come in.

Now, it’s important to stress that this is over the medium to long term. In the short term, as we’ve seen year to date, everything and anything can happen and probably, unfortunately, will happen.

So, those are the dynamics that I would keep in the forefront of investors’ minds.

Dave Baxter: Would you expect emerging market debt to behave like a safe haven, or is that a bit too much of a stretch?

Peter Dalgliesh: That’s too much of a stretch at this point. I think in 10 years’ time were we to have the same conversation, I think that’d be a valid question at which point I can say with greater confidence that, yes, the two regions would be converging.

Dave Baxter: We’ve discussed a bit about safe havens. So, it’s a natural opportunity to talk about gold, such a topical asset in recent months, recent years.

I’ve been fascinated by gold because in my view, it’s almost started to behave a bit differently to a safe haven in recent times because you appear to be getting some performance chasing. Then, when you get some periods of stress, you actually see gold sell off, which might be relating to people just seeing it as a source of liquidity because it’s their strong-performing investment, so it’s easy to take some profits.

Do you think it’s still a reliable haven, or should we view it differently?

Peter Dalgliesh: I think we need to wind back and understand the drivers of gold’s recent appreciation. When I say recent, we are talking 18 to 24 months, not just merely the last six months or so.

Really, the drivers have been since 2022, and Russia’s invasion of Ukraine, increased geopolitical risk. Unsurprisingly, specifically emerging market central banks woke up and realised, we’ve got too much US dollar exposure, which can be confiscated. Whereas if we’ve invested in gold, and we’ve got it in our vaults, then we’ve got greater confidence in the security and surety around that. That’s number one.

Number two, you’ve got a president who deliberately wants a weaker dollar. That is almost an explicit publicly stated strategy. Well, in that environment, you want to hedge to that, and so institutional investors have been embracing that as a means of insurance. That, I think, is the key bit around gold.

It should be seen as a source of insurance for the rest of your portfolio. So, it’s an important block within your portfolio, but it shouldn’t necessarily be seen as a trading tool. To your point, I think what we have seen specifically this year so far is that there’s been a flood of retail money, and that retail money is much more speculative. It’s more trading oriented and that is a warning sign that things are looking frothy, and therefore, we shouldn’t be surprised if we see some reset.

In terms of valuing gold, it’s notoriously difficult because it doesn’t generate a yield, and therefore, you haven’t got a net present value. You can’t do a discounted cash flow (DCF), and it’s very hard to do a comparative analysis versus the yield on government bonds, the yield on equities, etc. So it’s difficult in that. It’s a bit ‘feely touchy’.

There are studies that do, which I was reading about. So, an ounce of gold, how many dinners does that buy you in the Savoy Hotel, for example? And based on these measures, even after the appreciation in gold, it’s still not hideously stretched.

So, it comes back to my personal view, which is what is the purpose of gold within your portfolio? It is a source of insurance against an upset, a wobble, not only in fixed interest, not only in alternatives, which we might come on to, but also equities.

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Dave Baxter: So, let’s come on to potential alternatives. This has always been a difficult question, I should caveat, but I’m interested to pick your brains on what still serves its role as a diversifier beyond what we’ve already discussed?

Peter Dalgliesh: I think what we haven’t touched on is the risk of inflation. There’s a working assumption among consensus now that we’re going to get some further interest rate cuts because inflation’s coming back down towards the 2% target. The Bank of England is saying they’re going to be 2% by 2027.

I have some concerns around this. I don’t think that that increased nationalism I was talking about in conjunction with the desire and want for security around energy, commodities, food, or as well as a reduction in just-in-time deliveries across the global supply chain. All of that points to me in the direction of some upward pressure on inflation.

In that environment, what do we want in a portfolio? We want real assets. We’ve already touched on gold. That’s why it’s there. For some, gold is an inflationary hedge. For others, it’s deflationary hedge, you know? So, regardless, it’s a source of insurance.

The other sources of real asset exposure, though, are the likes of timber infrastructure, whose contracts the underlying companies tend to have are inflation-linked. That is something that I think is really important.

I would definitely include commodities within that for all the reasons we’ve discussed. That’s not only industrial commodities, it’s not only precious metals, it’s also food.

So, those food commodity items shouldn’t be disregarded. The fact that we’ve been going through this horrendous weather period...I was listening to the radio this morning, and it said after a week of being underwater, winter barley is dead. So, that has an implication of what the future harvests might be in the summer and the read through of that. So, these are all factors which are important as to why real assets have a genuine place and purpose within a portfolio.

The additional element within alternatives, I think in a world of increased dispersion, so it’s not all just one-way traffic, the opportunity for absolute return and hedge fund managers is increasingly of interest. I know it’s a bit of a Marmite area.

Dave Baxter: I was about to say that a lot of people have been pretty let down by absolute return. They were all the rage in the wake of the financial crisis, and then we had these big funds that did basically nothing and then even managed to lose money in rising markets and so on.

Peter Dalgliesh: That’s incredibly valid and goes exactly back to my point we were talking about earlier, which is that you need to really do your due diligence on the underlying funds. Track record is crucially important, particularly in periods of market stress. They have a role in your portfolio, and if you don’t have proven capability of delivering on that role in times of market difficulty, well, then I would encourage people not to go near it.

Dave Baxter: OK. Finally, an area we haven’t really got to grips with yet, but as part of this more uncertain period, people naturally are interested again in defence stocks, which was understandably a very taboo area for a long time and seems to have become more mainstream.

But to my eye, it’s not that straightforward to take on that exposure via a broad tracker because they are not always that massively, at least directly, present in certain markets. So, how would one go about trying to take on some of that exposure?

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Peter Dalgliesh: I think you need to, like you’ve indicated, think about it a bit more broadly. So, take the blinkers off. You can wear the blinkers, I hasten to add. I think there is a Deutsche Bank defence ETF, which has done what it says on the tin. So, they do exist. I think if you were a value-oriented investor, you might struggle with it because a lot of valuations are now after the rally. Really, really quite stretched or challenging.

So, it’s then a question of, do we think this theme has durability to it? And for all the reasons we touched on, it’s difficult to see why at this point it’s going to suddenly dissipate. So, it’s then a question of, how can you gain access to it tangentially? There are two ways which spring to my mind.

One is through commodities because defence expenditure has an enormous amount of commodity element to it. If you think about conventional defence, whether it’s to hard equipment or the technology that goes into defence, because this is another element which people fail to fully understand, defence investment is incredibly tech-rich.

So, to that extent, I think that the commodity space is being further bolstered by these thematic trends when it comes to defence, and it’s especially so in rare earths.

Rare earths, to all intents and purposes, China has 85%-plus control and is responsible for the processing of rare earths, 85% in the world. You can understand why the US is uncomfortable with that.

That, I think, lends itself, hoists a flag of interests, which is that you can invest in commodities. You can invest in those providers of finance to defence companies because the ramp up in capex among defence manufacturers, that’s going to continue. It’s not going to be on the scale of AI.

Dave Baxter: So, how would you do that? Are you talking about bonds?

Peter Dalgliesh: No. I’m thinking more in terms of commercial banks. Because the debt side of things in terms of the investment-grade credit, assuming they will be investment-grade issuance, is an opportunity, but to all intents and purposes, I don’t think that’s necessarily going to give you the alpha opportunity that you could potentially extract via an equity.

The equity side of things is through financials and the financial sector, in which case you then drill down into those geographical areas, regions and indices where financials makes up a regional heavier proportion.

In that regard, you can see the UK’s financial position is pretty attractive. Europe, likewise, but the standout is to the Asia Pacific and emerging markets. Now, they are less on the radar versus the defence expenditure programmes that have been announced in Germany and Europe specifically.

But we’ve got Sanae Takaichi winning in Japan, who has made a commitment to increase expenditure on defence. That will have a Japanese orientation to it, but I suspect the Asian defence manufacturers will similarly be rubbing their hands in excitement as to what might potentially, with the expansion in the market, be ahead of them.

Dave Baxter: So fresh legs to that trade?

Peter Dalgliesh: Potentially.

Dave Baxter: So, that is all we have time for, but thanks very much for your time.

Peter Dalgliesh: Not at all. Thank you.

Dave Baxter: And thank you for watching and for listening. Let us know what you think in the comments, and catch you next time.