• The Dow Jones Industrial Average suffered its worst day of the year Thursday, as investors continued to be on edge about the ongoing tensions between Russia and Ukraine.
• Western leaders and NATO have cautioned against taking Moscow at its word and President Joe Biden warned that Russia could be involved in a "false flag" operation.
• Bhanu Baweja, chief strategist at UBS Investment Bank, has argued that markets were reverting to the "playbook from 2014."

It's been a volatile week for global markets, with the Dow Jones Industrial Average suffering its worst day of the year Thursday, as investors continued to be on edge about the ongoing tensions between Russia and Ukraine.

Addressing the United Nations Security Council on Thursday, U.S. Secretary of State Antony Blinken made an urgent appeal against a Russian invasion, after Western leaders rubbished the Kremlin's claims of a drawback of troops and Ukraine accused pro-Russian separatists of shelling a civilian village.

Some selling pressure looked to be easing on Friday morning, on hopes that a meeting between Blinken and Russian Foreign Minister Sergey Lavrov next week may yield a diplomatic solution to the standoff.

But there remains a lot at stake, with Western leaders and NATO cautioning against taking Moscow at its word and President Joe Biden warning that Russia could be involved in a "false flag" operation.

Assets across the spectrum have been affected by the geopolitical tensions, including oil and natural gas, wheat, the Russian ruble and safe havens such as gold, government bonds, the Japanese yen and the Swiss franc.

Philipp Lisibach, chief global strategist at Credit Suisse, told CNBC earlier this week that any confirmed de-escalation would give a boost to risk assets after a period of uncertainty and volatility.

"If we have, let's say, a resolution in terms of the geopolitical issues that we currently face, I would imagine that the global economy takes a breather, risky elements of the market can certainly recover, the cyclicality and the value trade should probably do well, and European equities particularly that have come under pressure, we assume that they can continue to outperform, so we would certainly look into that angle specifically," Lisibach said.

'General geopolitical hedges'

Given the vast array of possible outcomes to the current standoff, investors have been reluctant to set forth a base case scenario, opting instead for careful portfolio hedging to mitigate the potential downside risks of a Russian invasion, while capturing some of the upside in the event of a de-escalation.

"We would rarely look to position for material geopolitical risk, as it's so opaque. That said, we do have some general geopolitical hedges in the portfolio, principally gold and, depending on the source of the risk, some oil exposure, as well as, of course, some government bonds, though with reduced duration," said Anthony Rayner, multi-asset manager at Premier Miton Investors.

Bhanu Baweja, chief strategist at UBS Investment Bank, argued earlier this week that outside of energy and Russian assets, markets had actually not priced in a great deal of risk.

"We have seen equities come off a little bit, but if you look at consumer durables — because that is the one sector or subsector that would definitely be impacted through weaker growth and higher inflation — in Europe that sector is doing much better than it is in the U.S." he said.

Baweja added that U.S. high yield debt is also underperforming that of Europe, while the euro has remained relatively steady.

Markets are tracking the "playbook from 2014," Baweja suggested, when Russia first invaded Crimea and the subsequent levying of sanctions against Russia through the summer.

"Through that period what really happened was some parts of CEE FX got impacted, oil rose a little bit in the first iteration, came down in the second one, so not a lot happened in stocks, so really it became quite a local event," Baweja told CNBC on Tuesday.

"This time it seems much more serious, but I don't think investors want to completely upend their way of thinking and probably want to look for hedges, rather than completely changing their core portfolio."

FX seen as the best hedge

In terms of hedging, Baweja suggested that with equity and bond volatility already high due to central bank speculation, investors should look to foreign exchange markets, where volatility is still relatively low.

"Similar to 2014, I would be looking at CEE (Central and Eastern Europe) FX, places like dollar-Pole (zloty) or dollar-Czech (koruna), for hedges," he said.

"Russian assets themselves have moved a lot so they along with energy are pricing a lot of risk, which also means if the situation becomes better, then you really shouldn't see global equities seeing massive relief from that, you should see Russian assets going up and energy coming down."

If the situation escalates, Baweja suggested hedging through FX rather than buying defensive stocks or favoring U.S. assets over Europe.

"If we have to do it within equities, we think DAX and European banks are probably the best hedges," he added.

While equity markets in Russia and around the world continue to look sensitive to geopolitical developments, the ruble has remained relatively robust around the 75 mark against the dollar, despite some volatility.

Luis Costa, head of CEEMEA FX and rates strategy at Citi, told CNBC on Thursday that flows into the ruble are likely to render it the most resilient Russian asset class, with high energy and gas prices pointing to strong current account surpluses in Russia.

"And let's not forget Russia used to buy FX, they used to buy dollars as a derivative on the fiscal law, and they stopped the purchase of dollars about a month ago in order to support the currency," Costa said.

"This is making natural flows in Ruble even more positive for the currency, so we think that – in the whole asset array of Ruble risk, of Russia risk, credit, rates, bonds and FX – FX will continue to be the most resilient part of the puzzle here."