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For a while there, it seemed as if investors had forgotten about that pesky little threat to the market known as "geopolitical risk." But recent acts of violence around the world serve as a reminder that the threat has not gone away.

Whether or not you believe geopolitical tensions are on the rise, buying defense, energy and high-quality stocks in general might be one way to hedge against the uncertainty.

In the past two weeks, global aggression has escalated, with deadly bombings in Turkey and a slew of allied deaths in Iraq. Investors have paid little heed so far (at least from a financial perspective). Although stocks have fallen for two straight weeks, many analysts say that was more a result of profit-taking after a recent run-up, not necessarily a reaction to geopolitical events.

At least one analyst is concerned by this nonchalance. "Some claim that because one cannot quantify geopolitical risk that it should not be factored into investment strategies," said Richard Bernstein, the bearish strategist at Merrill Lynch. "It is the threats to performance that are not quantifiable that potentially pose the biggest risks, because they are rarely factored into the strategy."

Bernstein has long recommended high-quality names, or low-risk companies with strong balance sheets, because he believes they are severely undervalued compared with riskier assets. But he now thinks they make sense for another reason, too. In times of great uncertainty, investors typically flock to safer, less-volatile issues with more predictable revenue streams. If geopolitical tensions become a more serious concern, high-quality stocks should outperform.

Smith Barney analyst Tobias Levkovich, who has been more bullish on the market this year, also has grown cautious in recent weeks, because stocks are not as attractively valued as they once were, and because terrorism and the "Iraq quagmire" continue to hang over the market.

Since President Bush declared an end to the war in Iraq on May 1, 290 U.S. troops have been killed, 185 in hostile fire. Meanwhile, the costs of the Iraqi operation are soaring, and oil prices remain high. "Perhaps we should consider whether the war in Iraq started instead of ended when Saddam Hussein's statue fell," Bernstein said.

Before the Iraq confrontation began, experts predicted that the war would probably be quick and inexpensive if fought in the desert. If fought on the streets of Baghdad, however, they argued it could take much longer and be far more costly.

"We believe that objective investors should consider whether these military experts had a point, and whether the current conflicts in Iraq constitute a 'security problem' or whether they are the war itself," Bernstein said.

If investors determine that the war never really ended, defense stocks could outperform, he added. The defense sector already has done well since May 1, with the Philadelphia defense index up 24%.

General Dynamics

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has climbed 36%, and

Northrop Grumman

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is up 7%. Still, other firms such as

Lockheed Martin

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and

Raytheon

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have declined in recent months.

With oil prices still high, it also makes sense to plant some money in oil stocks. Several pundits dislike this strategy, noting that oil prices will come down as Russia ramps up production.

But the recent arrest of Russian oil magnate Mikhail Khodorkovsky suggests that a quick increase in production might not be forthcoming, according to Bernstein. "This recent incident should remind investors about the risks associated with significant capital investment in an emerging market," he said, adding that the energy sector could be "one of the great growth stories of the early to mid-2000s."

While it's doubtful that geopolitical risk will decline meaningfully over the next few months, that doesn't mean investors will choose to focus on it. The daily fighting in Iraq has started to become a sad fact of life, and few investors are shocked by troop deaths anymore. But some analysts say the market's tolerance for violence has limits. What those limits are remains to be seen.