Did you know that since 2022, global equity markets have experienced an average increase of over 30 percent in volatility during periods of elevated geopolitical and policy uncertainty, as measured by the VIX index relative to its long-term average. At the same time, global trade growth has slowed to nearly one-third of its pre-2020 pace, while crude oil prices have remained structurally elevated compared to the last decade.

In the last three years, global markets have faced a rare convergence of risks. Trade fragmentation has slowed global commerce, geopolitical conflicts have redrawn energy supply chains, and oil prices have remained structurally higher than the decade preceding the pandemic. According to the World Trade Organization, global trade growth in 2024 was barely above 1 percent, while equity market volatility has consistently remained above long-term averages since 2022.

Yet, despite this challenging backdrop, corporate earnings have not collapsed, banking systems remain stable, and economic activity continues, albeit unevenly. This gap between persistent uncertainty and relatively resilient fundamentals is what defines the current investment environment.

Markets are not breaking down. They are becoming more selective.

In such phases, investors are rarely punished for patience, but are often penalised for impatience. The real risk lies not in staying invested, but in reacting emotionally to every new headline.

To understand how we are positioning portfolios today, it is important to examine the forces currently shaping market behaviour.

Key Forces Shaping Market Behaviour Today

While uncertainty can originate from many directions, three themes are currently exerting the greatest influence on global markets. Trade policy ambiguity, lingering geopolitical conflict, and uneven risk appetite are collectively shaping how capital is being allocated and which businesses are being rewarded.

US Trade Policy Uncertainty and Its Impact on Sentiment

Uncertainty around US trade and tariff policy has become a persistent feature of the global investment landscape. Over the past two years, markets have reacted less to individual tariff announcements and more to the absence of long-term policy clarity.

For global corporations, this uncertainty directly affects capital allocation decisions. When supply chains are at risk of disruption or higher tariffs, companies delay expansion plans, diversify sourcing, or increase inventories. Each of these responses adds cost and reduces efficiency.

This has been visible in market valuations. Globally exposed sectors such as industrials, chemicals, and export-driven manufacturing have seen valuation multiples compress, even in cases where revenue growth has remained stable. Investors are demanding a higher risk premium for uncertainty, not necessarily for deteriorating earnings.

India offers a useful illustration. Over the past two years, foreign portfolio investor flows into Indian equities have swung sharply between inflows and outflows during global risk-off episodes. However, domestic corporate earnings, particularly in consumption-driven businesses, have remained resilient. This divergence highlights an important point. Trade uncertainty has influenced sentiment and pricing more than business fundamentals.

For disciplined investors, such phases often create opportunity. When high-quality businesses are temporarily marked down due to global uncertainty rather than company-specific weakness, long-term returns tend to be shaped by patience rather than prediction.

The Russia–Ukraine Conflict as a Structural, Not Immediate, Risk

The Russia–Ukraine war continues to remain unresolved, but its role in markets has evolved. In 2022, the conflict triggered abrupt shocks across energy, commodities, and inflation. Today, it functions more as a structural overhang than a daily market catalyst.

Global energy supply chains have adapted meaningfully. Europe has reduced its dependence on Russian energy imports by more than half, while alternative suppliers and strategic reserves have softened supply risks. As a result, while oil and gas prices remain sensitive to escalation headlines, they are significantly below their crisis peaks.

Inflation provides another illustration. Global inflation rates, which surged in the immediate aftermath of the conflict, have moderated as energy prices stabilised and supply chains adjusted. Central banks now view inflation risks as more manageable than they did two years ago.

That said, escalation risk has not disappeared. Any disruption to energy corridors or expansion of the conflict could quickly reintroduce volatility. Markets are therefore pricing this risk as a background probability rather than an imminent threat.

For investors, this reinforces a familiar lesson. Businesses with strong balance sheets, pricing power, and limited dependence on volatile input costs tend to navigate such environments far better than highly leveraged or commodity-sensitive peers.

Middle East Tensions and Oil Risk as the Key Transmission Channel

While geopolitical tensions in the Middle East are not new, their relevance to markets today is closely tied to one variable: oil. Unlike equity or currency markets, energy prices have a direct and immediate transmission into inflation, corporate margins, and macro stability, particularly for import-dependent economies.

Oil markets remain acutely sensitive to disruptions around critical supply routes such as the Strait of Hormuz, through which roughly one-fifth of the world’s oil supply passes. Even limited escalation in the region tends to introduce a geopolitical risk premium into crude prices, regardless of whether physical supply is actually disrupted.

From an investor’s perspective, it is important to distinguish between short-term volatility and sustained price pressure. Historically, oil prices have often spiked on geopolitical headlines, only to retrace once supply continuity becomes clear. What matters far more for markets, and especially for India, is the duration of elevated prices rather than temporary swings.

India imports more than 80 percent of its crude oil requirements. Sustained increases in oil prices feed into higher inflation, pressure on the current account, and tighter financial conditions. This, in turn, affects interest rates, currency stability, and corporate profitability across multiple sectors.

At present, markets appear to be monitoring oil-related risks rather than fully pricing in a prolonged supply shock. Brent crude prices remain well below their 2022 highs, suggesting that investors are assigning a lower probability to a severe or extended disruption. However, the margin for complacency is limited. A sustained move higher in oil prices would materially alter macro assumptions and equity valuations, particularly in oil-sensitive sectors.

This is why oil remains a variable we watch closely. Not because it guarantees disruption, but because it has the power to change the investment environment quickly if conditions shift.

Uneven Risk Appetite and the Changing Nature of Market Leadership

When multiple sources of uncertainty coexist, markets do not shut down. Instead, they change what they reward. Over the past two years, this shift has become increasingly visible in global equity markets.

Periods of elevated uncertainty tend to reduce tolerance for speculative narratives and unproven growth stories. Businesses that rely heavily on optimistic future assumptions or continuous capital raising face greater scrutiny. In contrast, companies with established cash flows, strong balance sheets, and predictable earnings tend to attract capital.

This pattern has played out repeatedly across market cycles. During recent bouts of volatility, stocks with weaker fundamentals have seen sharper drawdowns and slower recoveries, while high-quality companies have demonstrated relative resilience. Importantly, this does not always mean strong absolute returns, but it does mean lower downside and faster stabilisation.

A useful illustration can be seen in market breadth. In uncertain environments, fewer stocks drive overall index performance, and leadership narrows. This often creates the impression that markets are flat or range-bound, even as meaningful dispersion exists beneath the surface.

For investors, this environment raises the cost of behavioural mistakes. Chasing momentum, reacting to headlines, or rotating aggressively between themes tends to erode returns. Markets become less forgiving, not because risk disappears, but because it becomes unevenly distributed.

This is the context in which we are cautious, but not defensive. We recognise that uncertainty is elevated, but we also recognise that quality assets continue to compound value even during such phases. The objective is not to avoid volatility entirely, but to ensure portfolios are positioned to withstand it without unnecessary churn.