From the desk of the CIO: The importance of a robust investment process during geopolitical turbulence
Valuation discipline helps avoid overpriced assets and manage downside risk in volatile markets.
Key Takeaways
- Israel’s attack on Iran is sending shockwaves through markets, with risk being repriced and reflected in falling global equities.
- But history shows that wars, terrorist attacks, or economic crises, markets tend to recover quickly, posting positive returns six months and one year later at a rate of 60% of the time or more.
- Valuation discipline helps avoid overpriced assets and manage downside risk in volatile markets.
- Active risk management enables flexibility to respond to market dislocations and capture potential rebounds.
Last week, Israel launched an attack on Iran, reportedly targeting nuclear enrichment facilities. With wars already raging on multiple continents, this adds to an already grim global backdrop, marred by tragedies affecting communities around the world.
From an investing point of view, we are seeing a few key details. Stocks are reacting, risk is being repriced, and major equity indexes are down 1–2%. It’s important to note that we’re seeing a short-term selloff—and it’s always possible it could get worse. Early indications show the situation could escalate and markets may move based on that. But for long-term investors, many will recognise that history shows that markets tend to withstand these events.
Looking at 20 major geopolitical shocks over the past 80 years, the pattern is clear: stocks have fallen about 3% in the month following a major event, but the median return one year later has been positive—up more than 8%. Understanding this is vital to understanding how Morningstar invests consistently, for the long-term, with portfolios positioned to weather external volatility.
Valuation discipline, diversification, and active risk management
Indeed, volatility has left its mark this year—both to the upside and the downside. In early April, markets experienced one of the fastest corrections in history, followed almost immediately by a swift rebound. On April 3 and 4, US stocks fell 10.9%—one of the steepest two-day declines in decades—only to recover all those losses by May 2. And in the 3 trading days between 3 April and close of 8 April, the Morningstar Australian Market Index fell 7.2%.
This kind of volatility may not be a blip; it could be the norm for a while. Markets appear more event-driven than they’ve been in the recent past, and that dynamic may persist. Morningstar’s multi-asset models are designed to help investors navigate this type of environment—through a combination of valuation discipline, global diversification, and active risk management. In a market shaped by uncertainty and potential regime shifts, these models attempt to provide a resilient core allocation.
At Morningstar, we believe our portfolios are built for these types of environments. Our investment philosophy and portfolio management process seek to instill a discipline that tends to thrive when reality falls short of expectations and volatility spikes.
How so?
We do not performance chase
Fueled by advances in artificial intelligence, US technology and tech-related stocks entered 2025 riding a wave of strong performance. The Morningstar US Technology Index returned 59.1% in 2023 and 36.2% in 2024. While some of that was justified by real fundamental improvements, valuations had also become stretched.
Rather than managing our portfolios with a fear of missing out, our valuation-driven process kept us cautious about owning these overpriced companies.
When valuations are rich, expectations embedded in stock prices tend to be extremely high—what some call “priced to perfection.” That creates vulnerabilities. Any disappointment–whether company-specific or at the macro level–can potentially lead to outsized losses.
This is why one of the key pillars of our investment philosophy is “price matters.” Put differently, we maintain a relentless focus on price because it helps build in risk management. While no one can know the exact correct price of every asset, we use a framework to estimate fair value ranges—creating a ‘margin of safety’ that acts as a risk management buffer.
Exhibit 1: Risk reduction by avoiding overvalued assets
Source: Morningstar Wealth. For illustrative purposes.
Risk in markets is never constant and often reflects the expectations embedded in prices. That’s exactly what we’ve seen in 2025. The reality hasn’t lived up to the market’s lofty expectations, especially in the most expensive areas of the market. By staying underweight sectors like US tech, which we viewed as overvalued, we avoided significant downside and benefited from that positioning.
We treat volatility as opportunity
Avoiding expensive areas of the market helps manage risk—but what about delivering robust returns? The flipside of avoiding overvalued assets is identifying undervalued opportunities and preparing to buy high-quality assets if they were to become cheaper.
As markets sold off, these cheaper, defensive assets held up better. That not only helped performance but also enabled the flexibility to be opportunistic and counter-cyclical. As equity and credit markets declined amid tariff uncertainty, we were able to add to assets that were getting hit the hardest. For example, we increased exposure to US technology stocks, and were able to add growth assets across the board.
While we didn’t expect an immediate turnaround, our quick, counter-cyclical moves allowed us to capture more of the recovery than we gave up during the drawdown.
Targeted approach: Leveraging a global team of investment professionals
In periods of heightened market volatility and stretched valuations, having a globally connected investment team capable of identifying opportunities adds value.
With resources around the world, we can pursue opportunities across global markets. Examples of international positions that have added value to our portfolios in 2025 include Brazil, Mexico, and South Korea. These kinds of niche opportunities have added value over time and we believe this differentiates us from our peers.
Exhibit 2: US among worst-performing stock markets YTD
Source: Morningstar Direct. Data reflects YTD performance as of May 29, 2025. ETFs used for analysis. References to specific securities not an offer to buy or sell. Past performance no guarantee of future results.
Preparing for the road ahead
In a market environment marked by elevated uncertainty, maintaining a disciplined approach is essential. Attempting to forecast short-term changes in trade policy, macro developments, or investor sentiment is difficult—and often exposes portfolios to risk at precisely the wrong time.
At Morningstar, we believe a long-term, valuation-driven approach is not only built to weather volatile environments, but also to capitalise on opportunities in a headline-driven market.
