What To Invest During War

Currently, the outlook for the global economy has deteriorated significantly, largely due to Russia's invasion of Ukraine.

When the war crisis is approaching, the global economy has not yet fully recovered from the  epidemic. Even before the Russo-Ukraine war broke out, inflation was already rising in many countries due to supply-demand imbalances and policy support during the pandemic, prompting central banks to tighten monetary policy.

How does War Effects Economic

Inflation

Inflation has become a clear and present danger for many countries. Even before the war, soaring commodity prices and supply demand imbalance had sparked a surge in inflation. 

Many central banks, including the Federal Reserve, have begun to tighten monetary policy.

These pressures were amplified by war-related disturbances. According to our current estimates, inflation will remain high for a longer period of time. In the United States and parts of Europe, inflation has reached its highest level in more than 40 years against a backdrop of tight labor markets.

At the beginning of the war, investors usually sell stocks driven by panic, so it is normal for the stock market to plummet, but as long as the war turns around, the global market will soon rebound strongly. Therefore, if you think that you have no ability to predict the direction of future wars (it is best if your country does not participate in the war), it is also a good choice to stay in the market to prevent the bottom from cutting meat

Stock Market Rises

Relevant records show that the so-called war effect once occurred in the U.S. stock market, that is, the market was weak before the war, but rebounded sharply after the war broke out. 

For example, on the eve of the Gulf War in 1991, the US S&P 500 Index fell all the way. In the month of Jan. 17, the first U.S. bombing of Iraq, the S&P 500 rebounded 12%. The stock market during the Iraq War in the spring of 2003 also exhibited the same characteristics.

In fact, the stock market knows that what is destroyed by war will eventually be rebuilt, which means growth, profits, jobs and so on. Of course, this refers to local wars. The exception was World War II, as almost the entire world was at war, and it was a very uncertain time for investing.

Gold Prices Climb

Political turmoil will undoubtedly reduce the gold production capacity of gold producing countries and directly reduce the worldwide gold supply. When the fiscal deficit of gold-producing countries increases, it will make them convert a large amount of gold into foreign exchange to maintain the value of their currency and reduce the supply of gold. In addition, from an investment point of view, political instability will cause a large number of investors to withdraw from other financial markets and turn to gold value-preservation investment. This kind of physical investment will bring investors more security, which will expand the interest in gold. Demand stimulates the price of gold to rise.

Crude Oil Prices Will Pushed Higher

Looking back on the history of more than ten years, the wars in the Gulf region are actually wars to seize oil. Whether it was the Iran-Iraq War in the 1980s, the Iraqi invasion of Kuwait in 1990, or the Gulf War launched by the United States in 1991, all were accompanied by the "black gold war" for oil.

The price of oil rose three times due to political and military crises in the Middle East. The oil crisis in the early 1970s led to a global economic depression. During the first Gulf War in 1991, the price of crude oil soared to more than 40 US dollars, which also hit the world economy.

Dollar returns to dominant trend

Citigroup notes that the dollar weakened after military operations in 1991, 2003 and 2011, when the dollar was in a bear market. The opposite was true in 1999 and 2001, when the dollar was in a bull market. This time around, the dollar should return to strength once the military intervention begins.

On the whole, if a war breaks out, it will cause the market to worry about economic development, and people will buy hard currency gold to preserve their value, so that the price of gold will rise sharply, and the value of the dollar will depreciate. Therefore, the relationship between the US dollar and war is opposite. If there is no war, the value of the US dollar will appreciate; if there is a war, the value of the US dollar will depreciate.

However, the irresponsible and sharp depreciation of the US dollar has transferred the huge expenditures required by the US war in Iraq to the creditor countries of the US in another way.

Commodity futures rise

One of the costs of war is the soaring domestic price. The price itself has a great impact on the commodity market.

Generally speaking, before and after the outbreak of war, strategic materials (copper, oil, etc.) rose for a long time, and grains (corn, soybean, etc.) rose for a long time, and remained high or declined slowly for a long time after the war.

Taking the international copper price as an example, World War I was the time when the international copper price hit a historical high; after the war, it fell slowly and formed a bottom in 1934; then, under the expectation of World War II, it began to rise, and formed a wavelet acceleration before the war broke out. After the 45-year war, because World War II was far more destructive than World War I, post-war reconstruction and economic recovery required a lot of copper, so copper prices continued to rise after the war.

Should Investors Switched to Safe Assets?

There are two important premises. One is to admit that we cannot predict the development of future wars, and the other is that his country has not participated in the war and is only one of the neutral countries. In this case, I don't think it's a good choice to stick to the stock, but at least it's not a bad choice, because it will rise sooner or later, and whether you just sell at the bottom and miss the rebound, or it is difficult to act wisely It is expected that at this time, I would rather stay still than move. Anyway, the substantive impact of the war on neutral countries is very limited.

So, if a war breaks out, how should we allocate our wealth to avoid losses? Are stocks worth investing in? Today I will answer these questions.

Let me say the conclusion first. If there is a war involving the country, especially if the war may burn the country, I don't think it is appropriate to invest too much money in the stock market. In wartime, gold and land can be over-allocated, cash is standard-allocated, and art, stocks, and bonds are under-allocated. 

What to Invest During War

So if war really comes, how can we protect our assets? In order to deal with these uncertainties, how should we lay out?

In the allocation of large-scale assets, the risk-return characteristics of each large-scale asset are different. It can be said that every time an additional type of risk needs to be addressed and an additional demand is addressed, at least one additional type of asset must be added.

The most primitive asset class is cash. The biggest advantage is that holding will not lose money, but because there is no profit, it will definitely depreciate relatively. The faster the central bank issues currency, the faster the cash depreciates.

Therefore, it is necessary to invest money to generate money. The simplest investment methods are currency funds and bank demand deposits. The flexibility and liquidity are very good, and there is also an annualized return of about 2%, but it still cannot beat the inflation CPI, let alone the broad money growth rate M2.

In order to outperform inflation, there are asset classes with higher annualized returns: wealth management products, time deposits, large and small collections, cash management, etc. The common feature of these products is that the annualized income is similar to domestic inflation, and the risk is very small. 

Stock

Stocks are typical high-risk and high-yield assets. Although the annualized returns of stocks are good, the differentiation is very serious. Institutional funds and retail investors have serious divergence in income, serious divergence in ups and downs among sectors, and serious divergence in ups and downs between companies and companies before.

When investors not only want to obtain high returns, but also have insufficient professional ability and hope to avoid their own operational risks, investing in stock funds has become a choice.

Raised Funds

Stock-type public funds are now a very convenient way to invest in equity assets. Public equity funds and private equity funds have been the same over the years, and the annualized returns of most funds are very good. But on the contrary, most of the Christians of public funds do not make money.

Brother Kun's E Fund Liquor is a well-known public offering fund. Alipay has released an investor income viewing function, which shows that the total historical return of this fund is 10 times, but 80% of the Christians who have invested in this fund in history have lost money.

Because public funds are too flexible, many Christians currently bring their past operating mistakes in individual stocks to public funds, such as chasing ups and downs, frequent trading, and short positions, etc.

In order to further avoid operational risks, equity investment and private equity funds can be selected.

Private Equity

The long-term strategic products in private equity funds are typical high-risk high-yield assets. The main differences with public offering funds are: there is a fixed lock-up period, which cannot be redeemed during the lock-up period, so liquidity is sacrificed; but in the second level, it is a good thing for retail investors to operate less, and the less they operate, the more they can avoid operating risks of.

But private equity funds are not limited to long term strategies. In terms of risk-return characteristics, there is also a type of quantitative hedging strategy that is very different. Although it is also a private equity fund, the risk-return characteristics of the long-term private equity strategy are similar to those of public equity funds; but the risk-return characteristics of private equity funds with quantitative hedging and arbitrage strategies are very similar to those of fixed-income funds.

The secondary market, no matter what kind of product it is, fluctuates frequently and even violently. In standard terms, the product is a net value product, and its net value is also regularly announced, so investors can also see these fluctuations. So what if you want income without volatility?

Equity

An unlisted company with a good track, a leader in a good industry or a dark horse is a better equity asset. Although it is an equity asset like the secondary market, it is not as volatile as the secondary market because it is not listed.

As long as the company is developing in a good direction, the valuation of equity assets will continue to rise without frequent corrections. However, as an equity asset, if investors want to obtain the final income, they must wait for the project to exit after the listing to get the income. Then there is a risk that they cannot exit, or the exit period is too long, and the liquidity is too poor.

Safe-Haven Assets

When war comes, the first thing that comes to the mind of all investors is definitely risk prevention, especially as assets in hand will not suffer losses due to war. Due to the uncertainty of wars involving major powers, especially this time Russia's game with the United States and the European Union has an unpredictable ending, and there is uncertainty about the direction of the war in Ukraine, which in turn has caused this conflict to have a greater impact on capital markets than other wars, with greater volatility in market sentiment. 

On the one hand, risk aversion has risen sharply and the prices of safe-haven assets have moved significantly. The futures price of gold, the first safe-haven asset, touched US$1,976.5 per ounce on February 24, the highest price in a year and a half. And the precious metals stock index, represented by gold, rose by nearly 20% in February. The second-ranked oil futures price has surged even more since last December, with Brent crude oil futures up 33%. The third-ranked US dollar and US bonds have also seen greater volatility recently. On the other hand, the market volatility has been repeated in the short term due to the intervention of the "fight and peace" news. The international stock market is up today and down tomorrow, which is difficult to grasp. But in the long run, this unexpected event on the stock market interference should be temporary, will not cause long-term impact and change the long-term trend, the speculation on safe-haven assets is only a short-term opportunity.

Geopolitical Sectors

War conflicts can easily cause supply tensions for the main export products of the countries involved, triggering price increases for related products, especially this time in the case of the West's all-round sanctions against Russia, which is likely to lead to disruptions in the export of Russian and Ukrainian products, leading to price increases for international commodities. In this regard, the most direct is the price increase of Russian and Ukrainian exports that account for a large share of the international market supply, such as oil and gas and agricultural products. At the same time it makes the import and export of countries that maintain normal trade with Russia look very precious, such as the geopolitical sectors related to trade with China and Russia are likely to benefit from becoming hotter as a result.

Conculsion

In fact, local wars do not have a significant impact on the stock market. Even in a world war of the magnitude of World War II, the US stock market continued to rise in the wartime years. 

There is a deep underlying logic here that war may in some sense boost the economic development of some industries, businesses and countries, and this is an important reason why certain Western countries often go to war. This is because modern warfare is a technological war but also an economic war, with consumption, technological change and the rise of new economies. From this logical point of view, advanced manufacturing should instead be a long-term concern for investors. Also from the perspective of capital looking at the long term, the most valuable thing to preserve and increase value is not gold, nor oil, nor circulating currencies such as the US dollar, but growth companies. When others are fearful, perhaps it would be a good choice for investors to turn their eye energy to those core assets that have adjusted to the top-performing leaders in place.