Pricing Armageddon: what should investors do faced with nuclear war?
The war in Ukraine has left investment analysts pondering how to put a price on existential risks.
Russia’s invasion of Ukraine is having a far greater impact on markets than the average geopolitical incident from recent decades. There are good reasons for that.
Markets were already unsettled by the changing macroeconomic backdrop, while sanctions on this scale have never before been deployed against a major economy and huge commodity producer like Russia. But the most worrying factor is that Russia has nuclear weapons, which raises a risk that most of us haven’t seriously considered since the fall of the Berlin Wall.
In a report issued at the start of this month, analyst Peter Berezin at BCA Research estimated that there is “an uncomfortably high 10% chance of a civilisation-ending global nuclear war over the next 12 months”. The obvious question being: what does that mean for markets?
Buy on a spike in fear
Berezin’s report has grabbed a few headlines along the lines of “nuclear war is bullish for shares”. Clearly, this isn’t his point. A story that US trader Art Cashin tells about the 1962 Cuban missile crisis is more illustrative. Cashin wanted to sell stocks, but his mentor, an experienced old hand, told him: “Look kid, if you hear the missiles are flying, you buy [stocks]. You don’t sell them... Cause if you’re wrong, the trade will never clear. We’ll all be dead.”
In other words, invest as if nuclear war won’t happen, because if it does, you won’t care about your portfolio. This makes sense. Even if you want to plan for the scenario of a devastating but survivable nuclear exchange (perhaps you have a holiday home in New Zealand), you’re still looking at a world where physical gold is about the only asset of potential use, and we’ve always suggested that MoneyWeek readers own a bit of that, so no change there.
So what’s the opportunity? Berezin argues that a spike in Google searches for “nuclear war” plus a run on potassium iodide (an anti-radiation treatment) implies that “a freak-out moment is coming, which will present a good buying opportunity for investors”. But it’s a bit more nuanced than “buy the dip”. What’s arguably more useful about Berezin’s report are his points on what a new cold war (which unlike nuclear war, seems inevitable) means for the economy.
Higher government spending on defence and alternative energy; a faster retreat from globalisation; and maybe even a tendency for households to save less, given “the ever-present danger of war”. All of these imply both higher inflation and higher interest rates. So if markets do “freak out”, be selective about the “bargains” you buy – because all of the factors that have been scaring markets for the past six months or so are only going to get worse.