Why Wartime Investments Can Pay Out in the Long Run

Why Wartime Investments Can Pay Out in the Long Run



Just as the world was about to exit a two-year-long pandemic that shook the global economy to its core and forced millions of people to explore remote work options, it was dragged headfirst into a wave of violence and a humanitarian tragedy not witnessed since the Second World War.To get more news about trade245, you can visit wikifx.com official website.

Thus, when Russian President Vladimir Putin ordered his troops to invade Ukraine in the early morning of February 24th, 2022, he caught many investors completely off-guard.

The resulting conflict has put more pressure on an already reeling post-COVID economy, led to thousands of casualties on both sides, and forced over 3.25 million Ukrainians to flee their country. But while this event is no doubt equal parts tragic and horrifying, does this mean that investors should liquidate all of their assets and run to their hideout with all of their profits?

Not at all! In fact, the best thing to do right now is to keep calm and adapt your strategy accordingly – after all, history is on your side. But before we get to the good part, let’s do a quick recap of how the ongoing war has affected the global markets so far.
At the time of writing this article, the Russia-Ukraine conflict is stretching into its fourth week and has resulted in tremendous destruction of civilian property and perhaps the most comprehensive sanctions package against a country the world has ever seen in its modern history. Some of the heavier sanctions, which are aimed at crippling Russia’s economy and its oligarchs, included a nationwide SWIFT ban, the freezing of over $600 billion in foreign cash reserves, and the recent ban on Russian oil imports by the U.S. and the UK.

The geopolitical turmoil has also forced many big-name multinational companies to temporarily or permanently terminate all their business operations in the region. Among them are:
In the first few days following the start of the war, the markets were rattled, but have since started to recover (more on that a bit later). Seeing that Russia is also a major exporter of both oil and natural gas, however, energy prices are already highly inflated, especially for Europeans who get a significant portion of their gas from Russian pipelines and who are now frantically looking into green alternatives. Food prices are also expected to rise as both Russia and Ukraine account for a considerable portion of the world’s agricultural supplies. For perspective, the exported wheat, corn, sunflower seed and other foodstuffs from both regions amounts to more than a tenth of all calories traded globally.

On the domestic front, the Russians are fighting another war – to salvage whatever is left of their economy. Due to the SWIFT ban, their national currency – the ruble – has plunged to record lows (at the time of writing it is worth less than one U.S. cent), which prompted the Russian central bank to boost its interest rate to an unprecedented 20%. In addition, the Russian stock market was temporarily halted, while the skyrocketing inflation has led to a steep increase in the prices of everything from bananas and multivitamins to tech and cars, with analysts predicting this situation to only get worse as the war drags on and Russia finds itself on the brink of default.

Wars rarely happen spontaneously, and the Ukraine-Russia conflict is no different as tensions between both countries were already exacerbated after the abrupt annexation of Crimea in 2014. The outbreak of the conflict saw the leading S&P index (US500) drop 5% and the price of Brent crude oil rally well above $100 per barrel, while gold jumped 3.9% to above $1900 a troy ounce.

The good news is that, although initially damaging to the global economy, in the long term the markets eventually grow accustomed to the geopolitical tensions and often perform even better than they did before the start of the war! In fact, shortly after this conflict began, European equities notched their biggest rally since March 2020, U.S. shares jumped the most since June 2020, while crude oil sank more than 10% to $110 a barrel. But why is that the case?

As it turns out, this is a well-documented phenomenon that researchers at the Swiss Finance Institute have dubbed “the war puzzle” after looking at U.S. military conflicts data following WWII. Upon closer inspection, they discovered that in all cases where a pre-war phase had threatened to escalate into a full-blown war, markets had initially taken a hit only to rise stronger once the gears of war actually started spinning. However, if the war caught the markets by surprise, the outbreak did the opposite effect and instead decreased stock prices.

In the current situation, a possible reason for the market rebound we are seeing now, in addition to the fact that the whole world suspected Russia’s true intentions months in advance, is that investors have realised that their bleakest forecasts for a full-blown nuclear WWIII will likely not come true, which prompted them to downgrade the conflict from a global to a regional one.