In recent months Google had a record high of search for these words ‘World War 3’. Well, as tensions between the US, Russia, China and North Korea are continuing to escalate with each super power refusing to back down and the ongoing weekly tests of missiles by Kim Jong-un the relations between the countries are really becoming increasingly strained giving the sign for an outbreak of World War 3.
It is not surprising that even Amazon has started selling gas masks for protection and Preppers are buying out emergency supplies from both offline and online stores. Though till date World War 3 remains as unlikely as ever, despite the fears stoked by the media and fake news sites. Whether war will hit or not but that is for certain that when it will come it will be all of a sudden and it will not be anything like we expect.
Few facts about financial markets at the time of war
Here are few facts about financial markets in the approach of world wars
Four Major Wars occurred between 1926 and 2013 including:- World War II (Sep 39 – Sep 45) The Korean War (Jun 50 – Jul 53) The Vietnam War (Nov 55 – Apr 75) The Gulf War (Aug 90 – Feb 91) The Iraq War (Mar 03 – Dec 11)
The stock market hates uncertainty and leading up to war there is plenty of it. It is interesting to note that stock market volatility was lower during periods of war. Intuitively, one would expect the uncertainty of the geopolitical environment to spill over into the stock market. However, that has not been the case, except during the Gulf War when volatility was roughly in line with the historical average.
Capital market returns during the Gulf War were different from other wars. This war was very short, spanning less than a full year. This period also coincided with an oil price spike that helped push the economy into a brief recession. The idea of recession during war time was fairly new, and reflected the changing U.S. economy. During previous wars, the economy was more exposed to capital goods and natural resources, which experienced greater demand to feed the war. However, by the 1990s, the economy had shifted away from heavy industry and toward the current “knowledge-based” economy. Thus, military demand had less of an impact, for better or worse, on economic growth.
Bonds generally under-performed their historical average during periods of war. This is likely, at least in part, because inflation has been higher during war times. Bond returns have historically been negatively correlated with inflation. Another explanation is that governments borrow more during wars, thus driving bond yields up and bond prices down. With the higher inflation and increased government borrowing associated with war time, investors seeking safety may want to think twice before shifting assets from stocks to bonds.
There are many economic and fundamental factors that impact security prices. Occasionally, a single event is powerful enough to dominate these other factors to singly influence capital market returns. However, historically speaking, this has not been the case with wars. Economic growth, earnings, valuation, interest rates, inflation, and a host of other factors will ultimately decide the future direction of the stock and bond markets.
The Stanford University in the US analysing the impact of the 2003 Iraq War determined that different sectors respond differently around periods of conflict. War is bad for Consumer industries – airlines, finance and IT. War is good for gold mining and oil stocks, particularly the sectors of the oil industry that would benefit from higher oil prices. Defence companies don’t do as well as expected. Defence stocks tend to rise ahead of anticipated conflict but they do not participate to the same extent in the wider rally that follows the onset of action.
The Geography location of a conflict has effects, due to a nation’s geographic proximity to the war, the involvement of their troops and their dependence on oil imports.
At war higher inflation and increased government borrowing associated with war time makes -shifting assets from stocks to bonds a bad choice. Buying a mixed portfolio of stocks for the long term is a good choice.
Baron Rothschild quote 1815 200 years ago: “Buy on the sound of cannons” (Conflict), “Sell on the sound of trumpets” (Victory)
As an investors if conflict seems inevitable Try to ignore the humanitarian aspect; remember markets feel nothing Work out a long-term investment strategy mixing relevant assets that will do well in war within a portfolio Try not to time the market or predict the top or bottom of a swing but make sure you are in the market – A major risk is in being out of the market when War takes hold – rises are quick – and seemingly inevitable Remember markets respond differently when there is no anticipation of conflict even on a sudden onset.
What have been predicted about money matters in case of war?
- The uncertainty that occurs during war will drop the value of assets of the bank even further thus delaying/reducing a partial repayment of your deposits if you get anything at all.
- Money flees wars and a country might impose exchange controls on money leaving the country. Thus your money is stuck there for the duration of the war unless there is good cause. In Argentina foreign currency deposits were converted to Pesos at a poor rate during their financial crisis around 2000.
- The real value of the money drops. The uncertainty in that nation reduces the value of the currency thus making it worth less in international terms. In the most extreme case the whole currency is destroyed and you are left with nothing. This occurred in the American Civil war when the Confederate States of America printed money to pay war bills, and when they lost the war all the money they had printed became worthless – except as collector’s items. They also suffered from serious counterfeiting problems.
- Wars cost money, thus the country will most likely raise taxes to pay the bills. As it is easy to tax interest at source expect to receive lower interest on your savings due to higher taxes.
- Enemy assets and bank accounts are seized; meaning if the address on the account is located in an enemy country, then the government takes the money in the account
- Non-sovereign accounts are frozen; what this means is that if a foreign country has a sovereignty problem, then any accounts originating in that country are usually frozen until the sovereignty problem is solved.
- Foreign exchange with the enemy is ended. That means you can’t send money or receive money from an enemy country.
- When a foreign country is occupied normally the local banks are shut down and the money is replaced either with that of the conquering nation or with a military scrip which is issued by the occupying army. For example, when the US occupied Okinawa the money used was a military scrip called the “B-Yen”.
- If you have a bank account in a conquered country, usually any money in that account becomes worthless, because the whole banking system of the country no longer functions. If you have gold deposits or safety boxes in a bank, however, those may be honored, at least temporarily.
What to do in case of war?
The question to this answer largely depends on what country you are and if it is occasional war or major war. But here are still few of the things you can do to save your money and yourself.
Get your documents and things organized
Firstly one should make sure that you have all your documents, passports etc organised. Check if you are entitled to overseas citizenship in case you wish to leave your country. If you have to leave in a hurry these are very important. Also a war can disrupt the ordinary issuing of these documents, so you don’t want to be waiting for years for a new passport.
Secure your assets
One should also start moving your money overseas. As the war progresses the economy will move to a more command economy, along with things such as exchange controls, controls on government resources etc. One should even consider making sure that the money is not even held in overseas banks which are owned by your country. Just be careful, remember families of Jews who left money in Switzerland in WW2 were not able to get it back.
Buy some shares at low prices
War is an opportunity to invest and pick up bargains at low prices. So if you are optimistic buy some shares etc in your local economy. Some shares will go up in value, such as construction and defense. Others such as fine goods go down. Gold will go up in value, but take care, it’s value will drop after the war, and can be confiscated.
Stockpile the things you need
As the war goes on supplies will become harder to get, and may become rationed. So once you know war is coming, go out and buy as much food and clothing you can. Also make sure you have tools and consumables for repairs.
If you are going to remain in your country make sure that your car is fixed, and if possible buy one which is of a common make and model. Because as the war goes on spare parts are going to be harder to find. Be careful when stockpiling fuel as fuel can ‘go off’ and is also flammable.
Also consider what you will do if you run out of money or money loses it’s value. Consider having some assets in things you can trade. Cigarettes were used in POW camps in WW2.
Prepare Bug out Bag
Prepare a Bug-out bag. This is a bag containing important things such as your documents, along with survival equipment, first aid kits, clothing, which you might need in an emergency. The idea is to have enough stuff in the bag to support yourself in an emergency. You want all the stuff collected together to grab without the delay of finding all the bits. It is a grab and go bag. Try and secure vital pharmaceuticals before they run out. Even food so that you are not starved like store can foods.
The best defence in such a case is to be prepared, and to encourage others to also be prepared. Well it is hope that world war 3 is far far away and if there is fear then there is hope too.