History Provides Some Guidance on Wartime Investments | Barita Insights | February 28, 2022

War Meets Inflation
In some ways, these first two months of 2022 have created a reminiscent feeling of uncertainty quite similar to 2020, before COVID-19 was officially declared a pandemic. During this period, the globe has witnessed inflation at levels not seen in 40 years while supply chain disruptions and shortages throughout the developed and developing worlds have remained a significant headwind. Further, everyday individuals are faced with the possibility that Central Banks may be on the verge of a significant policy error as initial talks of inflation being transitory have faded as inflationary pressures have become quite lasting. With that said, the global economy was already facing several issues of significance. Now, the Russia/Ukraine war has further added to the list of uncertainties that weigh on global growth and the collective prosperity of many. As the third-largest producer of oil in the World, Russia holds a position that can present serious ripple effects for all nations. The outcomes of this war are highly uncertain and ultimately dependent on the major player, Russia, and more specifically, its President, Vladimir Putin. Since we can neither predict the timeline nor the outcomes of this war, this article will focus on the lessons learned from previous large-scale conflicts as we seek to determine how investors should think in this period and resultantly, how investors can invest.

History suggests long term stock market effects are likely minimal
A brief look back at the US’ S&P 500 at varying points in history tells a story of significant decline, in some instances; followed by recovery in all instances. Historically, one of the sharpest declines witnessed by the market was the Pearl Harbor attack in July 1941. The market had a total drawdown of -19.8%, as reported by LPL Research. However, over the course of 307 days, less than 1 year, the market recovered. It’s important to note that this was not a foreign conflict as is the case with Russia and Ukraine, but a direct attack on American soil. We can add to this by looking back at more recent history. The U.S. terrorist attacks in New York, typically referred to as 9/11 was a major event that has been embedded in the memories of many, and one that sparked a -11.6% decline in the S&P 500 within 11 days of the attack. Again, notwithstanding the seriousness of the attack and the conflict that would ensue thereafter, the market recovered within 31 days. A report produced by LPL Research has tracked 20 geopolitical events relating to harmful attacks between the 1941 Pearl Harbor attack and the September 2019 Saudi Aramco Drone Strike. On average, these conflicts have resulted in a total stock market decline of -5.0%, requiring 22 days on average to reach their lowest point and 47 days to recover. Again, in all instances, the markets have recovered.

Investing during war and associated uncertainties
The result of that historical recount highlights two pertinent points. The first is that in many cases, there are still companies that continue to perform despite ongoing wars. Hence, markets have typically rebounded – the issue is therefore timing. The second is that while wars and geopolitical conflicts, in general, present a period of uncertainty; inevitably, all wars have ended, and markets tend to price-in this eventuality. Therefore, wartime investing is, in large part, reflective of traditional investment strategies that we’ve put forward through this medium many times. Specifically, it requires a well-diversified portfolio, investing in fundamentally sound companies, supported by strong balance sheets and clear opportunities for growth given their industry/industries and position within those industries. Additionally, however, there are nuances that vary depending on each conflict. With the current conflict, we have a preference for U.S. risky assets once the US remains out of the war from a military perspective. Europe stands to be the main area of shock and buying any European risky asset during a period such as this amounts to betting on the timeline and outcome of the war which cannot be determined, so we would generally not recommend it at this time. Within the US and some emerging markets, clear beneficiaries of this war are commodity producers, particularly those that export wheat and grains as Russia and Ukraine account for nearly 25% of total global exports, as well as those who can export neon and palladium, important metals in the production of semiconductor chips. In summary, industries that are dominated by Russia and Ukraine and could see a supply shortage, and therefore, price increase, could benefit the remaining countries and companies which creates an opportunity for investors; once investible. Now, this point is also important, market uncertainty is currently extremely high as this war comes on the back of several issues as mentioned above and as such, the facts are rapidly changing; thereby presently ambiguity regarding how to position any portfolio.

The effects on the JSE and Concluding Thoughts
At its current scale, we believe the effect of the ongoing Ukraine/Russia conflict on the Jamaica Stock Exchange (JSE) should be low and is likely to present itself through what we’ve already seen, higher costs as any Russia related dispute can affect the supply of several commodities and consequently, drive prices higher. In our view, the issues presented by the conflict itself, at this time, are not as economically significant as the conditions that prevailed leading up to the conflict – i.e., unprecedented inflation, supply chain issues, and rising interest rates. The addition of war is likely to exacerbate these issues that already existed. Therefore, a keen knowledge of Companies that were worst affected by the onset of the higher price of goods in 2021 presents a good listing of Companies likely to be strained if prices are to spike further. A clear roadmap is to position in Companies that are likely to maintain pricing power, have limited exposure to import costs, and are clearly on a rebound driven by renewed demand and efficiencies built throughout the pandemic. As the ongoing conflict persists, other issues are likely to surface such as the potential for damage to the global banking system if Russia’s banks are meaningfully cut off from the rest of the world. Therefore, at this time, we remain vigilant as we believe this is just the beginning of a conflict that has the potential to become much worse.