Global financial markets responded quickly to news reports that Pakistan opposition leader Benazir Bhutto was assassinated Thursday in a suicide attack that also killed at least 20 others at the end of a campaign rally. U.S. stock markets opened lower, while Treasury prices soared as investors sought the relative safety of U.S. government debt.
Given Pakistan's geographic proximity to Afghanistan, its nuclear capabilities and its pivotal role as an ally in the war on terror, Standard & Poor's Equity Research believes global equity investors will be watching to see if the situation stabilizes or unravels further.
Over the short term, the current flight to quality benefits U.S. Treasuries and gold as risk aversion mounts. Conversely, higher-beta asset classes (i.e., those with greater volatility) like global equities are weaker on the news. Whether this trade has legs will depend on how the situation unfolds.
S&P Equity Research believes the news from Pakistan highlights the importance of overall portfolio diversification. Bond and commodity allocations can help investors better navigate inevitable periodic bouts of geopolitical turmoil.
At this point, we do not believe this news is destabilizing enough to warrant a reduction in global equity exposure; however, we will continue to monitor the situation closely, given Pakistan's geopolitical significance and the questionable commitment to democracy of President Musharaf.