Wartime Investments
Tensions in Ukraine
For weeks now, tensions have been rising on Ukraine’s border. An enormous Russian military force has gathered at the country’s borders. In the east, in Russia itself, in the north, in neighbouring Belarus and south of Ukraine, in the Black Sea. Fears that the attack on Ukraine could begin at any moment caused a real selloff in the stock markets on Monday. Fearing that the oil supply from Russia would be hindered in a possible conflict, the price of a barrel of Brent oil rose to over 96 dollars. The US security adviser stated that a Russian attack could start any day now.
The correction was already underway
The falls on the stock exchanges fell in the middle of a correction that had been underway for some time. Besides the threat of war, the fear of imminent interest rate increases by the Federal Reserve played an important role in this. Since Friday evening, however, investors have discovered that there are more frightening things than interest rate rises. The threat of a military conflict between two superpowers brings much uncertainty. And if there is one thing investors do not like, it is uncertainty.
“The last thing you want to own is cash”.
Strangely enough, past experience shows that wars do not have to be so bad for the stock market. Something the world’s most renowned investor has known for some time. In an interview with CNBC, Warren Buffett stated: “You have to invest in something. And if we can be sure of anything, it is that wars affect the value of money. That happened in almost every war as far as I know. So the last thing you want to own during a war is cash. During the Second World War, the stock market soared”. A still young Warren Buffett bought his first shares in 1942, just after the Japanese attack on Pearl Harbor.
War returns
Buffett is right. During World War I, the Dow Jones index rose by more than 43 percent between 1914 and 1918. A return of 8.7 percent per year on average during the war. In September 1939 the Germans invaded Poland. It was the beginning of the Second World War. The Dow Jones rose by almost 10 percent in one day. When, in 1945, the bloodiest military conflict in modern history ended, the Dow Jones index rose by 50 percent during this period. A return of 7 percent per year on average.
Korea, Vietnam, Cuba, and Iraq
The Korean War raged from 1950 to 1953. Investors were able to book a return of 16 percent per year on average during this period. Vietnam? Between the sending of US troops in 1965 and their hasty departure in 1975, the index averaged 5 percent per annum. The infamous Cuban Missile Crisis in 1962? The confrontation lasted 13 days. The Dow Jones lost slightly, but only 1.2 percent. Incidentally, the index would rise more than 10 percent in the following year. The US invasion of Iraq in 2003? The index rose 2.3 percent the following day and would end the year with a gain of more than 30 percent.
Buying when the guns are roaring
History teaches us that it is not so much the war itself, but the enormous uncertainty that precedes it, that causes prices to fall. The increasing probability of war contributes to falling prices. The moment the long-awaited war actually breaks out, the uncertainty disappears, and the prices start to rise. Research shows that the volatility on the stock markets during wars is lower than average. Indeed, old stock market wisdom says that you should buy as soon as the cannons start to roar.
Cash is a bad investment
Cash is a bad investment in the long run, and it will only go down in value. During a war, this process is only accelerated. Investors are better off with productive assets such as shares. Rumour has it that a Russian attack could happen at any time. However, a small nuance is in order. A war is just when central banks have to pull out all the stops to fight inflation. Is that not a bit too much of a good thing?
