The Russian invasion of Ukraine has driven large parts of the global economy topsy turvy. Investors wonder if energy stocks are a good idea as sanctions squeeze Russia’s oil and natural gas sector. Others look at defense contractors as the answer. And, those who appreciate the damage that the war is doing to Ukraine’s exports of wheat, corn, and soybean oil look to agricultural commodities for refuge. When investing during times of war do you simply stay the course or totally change your investment strategy?
How War Affects the Stock Market
The US stock market went up during both World War I and World War II. Stocks tend to fall during the runup to a war and then recover once the war starts. When a war starts unexpectedly the market tends to fall and then recover. Surprisingly, market volatility tends to be less during a war than when there is no war. While the market goes up a bit during a war, which sectors profit the most and which suffer the most? Defense stocks are an obvious choice but so are critical materials like oil, lithium for batteries and fertilizer when Russia’s fertilizers are portioned out to “allies” and denied to “enemies.” Yahoo Finance lists Intrepid Potash, Lithium America, Northrop Grumman, Nutrien Ltd., Lockheed Martin, Raytheon Technologies, Barrick Gold, and Exxon Mobil as stocks likely to produce profits during the war and its aftermath.
Factors Confusing War Time Investing
As the war in Ukraine drags down the world economy the Covid-19 crisis continues, especially in China where the zero-tolerance policy has Shanghai shut down, and the recovering economy has sent inflation up to 8.5%. Neither of these problems will automatically go away just because a crazy Russian dictator is carrying out war crimes in Ukraine. Rather they will serve to modify, and at times, confuse the issue. As during the pandemic when the economy and the stock market were disconnected, the same may tend to be true with “war stocks” and the economy as the conflict in Ukraine drags on.
Russian Economy vs Russian Commodities
A factor that differs in this war as opposed to other wars is the set of sanctions imposed on Russia. The effects on Russia will be devastating and lasting. The effects on the rest of the world will fall into two categories. Russia has an economy the size of Spain or Italy. Thus, losing access to that economy will not have devastating consequences on most countries. However, Russian oil, natural gas, strategic minerals, and grains like wheat and corn are a different matter. Add to the mix the potential loss of much of Ukraine’s harvest and there is the potential for famine, food riots, and political instability in parts of Africa and Asia. That sort of social and political unrest has the potential to spark more conflicts and further damage economies across the developing world. A global recession stemming from that sort of scenario would likely have a greater effect on the stock market than the war in Ukraine by itself.
How to invest during a war is generally to take the long view using intrinsic value as a guide with a temporary loading toward “war stocks.”
Investing During Times of War – SlideShare Version