“Buy on the sound of cannons” is a famous investment adage, but it’s not well supported by history, says Stefan Hofrichter of Allianz Global Investors. Yes, a look back at 13 geopolitical crises, starting with the Cuban missile crisis in 1962, shows that stocks have on average tended to do better after the onset of a global crisis and safe-haven assets have tended to do worse. But that average disguises a lot of variation.
“There have been times when markets bounced back emphatically and times when they haven’t.” Overall, “non-crisis-related factors were the biggest drivers of performance” in each case – such as the end of a US recession (the Iraq War in 1991), or the onset of a financial crisis (the invasion of Georgia in 2008). “Investors should make their decisions to buy or sell based on the health of the overall economy and the outlook for industries and earnings.”
What we can value – and what we can’t
There’s certainly no point in trying to price in worst-case scenarios, says Peter Berezin of BCA Research. The likelihood of nuclear war may now be higher than it was, which is discomforting, but that’s not the kind of risk that one can usefully take into account when building a portfolio. Thus it’s logically consistent to say: “The risk of Armageddon has risen dramatically. Stay bullish on stocks”.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Still, even setting aside existential risks, “the world economy is facing a triple shock”, says asset manager Carmignac. “The uncertainty caused by the collapse of the post-Cold War geopolitical order, along with the risk of further escalation” is just one threat. Another is disruption to international trade, especially in commodities, such as embargoes and export controls. The third is “a financial shock, with potential defaults by Russian and Ukranian entities, and contagion risks to other countries”. Thus the world faces a growing risk of stagflation – “an economic slowdown coupled with high inflation”.
A most dangerous year
Conditions are certainly starting to look reminiscent of the 1970s, say Christian Keller, Rahul Bajoria and Akash Utsav at Barclays. Oil has topped $120 per barrel. The change is not as big in percentage terms as the oil embargo of 1973-1974, but natural gas – which is far more important to the economy today than it was five decades ago – has increased even more, “implying a massive energy-price shock”. Note too that “the ongoing price surge extends beyond energy into industrial metals, fertiliser and grains, which have all soared this week”. This bodes especially poorly for growth in Europe and much of Asia, while Latin America may be less affected since “the region gains most from the global commodity boom”.
Hence “this could turn out to be one of the most dangerous years for stock investors of the current bull market”, says Ed Yardeni of Yardeni Research. The US S&P 500 has held up “remarkably well” – it’s down 10% since the start of the year, better than most countries – but is likely to end the year lower. Investors should favour energy as a hedge against inflation and financials as a hedge against rising interest rates.
-
Four income funds to add to your ISAAdding one of these four income funds to your stocks and shares ISA ahead of tax year end could pay dividends
-
Are regular savings accounts worth it?A 7% interest rate is eye-catching, but how much can you save in a regular saver account and how does the interest rate work exactly?
-
Three top-notch Taiwanese companies cashing in on the advent of AIOpinion Eric Chan, investment director and co-manager of the Aberdeen Asian Income Fund, highlights three potential Taiwanese winners in the technology industry
-
Weight-loss drugs could revolutionise the economy – the investments to buy nowThe new generation of weight-loss drugs are a boon for the overweight, but they also promise to change our relationship with food and revolutionise the economy
-
Find tomorrow’s Asian giants while they are still smaller companiesOpinion Nitin Bajaj, portfolio manager of the Fidelity Asian Values trust, picks three Asian companies to invest in.
-
AI will maintain Moody’s market lead, says Stephen ConnollyOpinion Veteran data provider Moody's has adapted well to the modern world, and is one of Warren Buffett’s longest-held investments
-
Is BlackRock World Mining gearing for a recovery?Opinion After a frustrating year, BlackRock World Mining is positioned for growth and to capitalise on the sector's recovery
-
Should you limit exposure to US tech stocks?An end to the AI boom would shake both US funds and global trackers. Here’s one way to trim exposure to US tech stocks
-
The mystery of America’s gold and why an audit mattersHow much gold does the US actually have? Dominic Frisby explains why it matters
-
Art vs AI: artists’ uprising takes on the botsAI performs impressively, but it’s all based on human work that was taken without payment. The government thinks this is fine. Copyright holders beg to differ
