The terrorist attacks in Paris took a terrible toll of human life. The fact that they were so thoroughly planned and precisely executed leads to concerns by law enforcement professionals that there may well be more to come. As a result the market effects of the Paris attacks have started with a rush to safety. Bloomberg Business reports that emerging markets slide due to risk aversion.
Emerging markets bore the brunt of a clamor for safety as Europe’s worst terror attack in more than a decade compounded concerns over deteriorating economic growth and looming U.S. interest-rate increases.
A gauge tracking 20 developing-nation currencies fell toward a record and the MSCI Emerging Markets Index declined to a six-week low. Asian airlines tumbled on speculation tourists will cut back on travel to Europe, while Turkish Airlines fell 1.6 percent in Istanbul. Concern deepened that geopolitical tension will curb trade and slow global growth after least 129 people were killed in seven locations across the Paris area on Friday night. Russia’s ruble and Brazil’s real gained with oil.
The violence came at a time when China’s slowdown has curbed the outlook for trade flows with other emerging nations, while the odds for the Federal Reserve to start raising rates in December is undercutting the appeal of riskier assets offering higher returns. Chinese equities in Hong Kong led declines on Monday as mainland officials tightened curbs on the use of borrowed money to buy Chinese shares.
From an investment point of view our question is if the market effects of the Paris attacks will be temporary or are an introduction to an ongoing trend. The question is if social and political unrest and violence will drive markets downward or if markets will respond positively at some point. What is the response to violence and will that response help economies and markets? Let’s look at defense stocks and developing economies.
Barron’s writes that defense stocks are ready a takeoff. This article was based on technical indicators. However, a common response to threat is an increase in defense spending.
After lagging the market most of the year, the aerospace and defense sector is poised to rally. Given how far it has fallen and the pattern from which it is emerging, several stocks in the group are in great positions for decent gains in the coming months.
The NYSE Arca Defense Index recently emerged from an inverted or upside-down head-and-shoulders pattern. And after a small pause, it now looks ready to break out to the upside through its declining March trendline.
Although Barron’s is looking at technical indicators we are looking at the facts on the ground. When a nation feels threatened its leaders commonly increase defense spending in response to real or perceived threats. A look at the response to 9-11 is instructive.
Post 9-11 Defense Spending
The 9-11 attack in New York led to the Afghan and Iraq wars and greatly increased defense spending. According to the Congressional Research Service the cost of Iraq, Afghanistan and other global war on terror operations ran to $1.6 trillion from 2001 to 2014.
With enactment of the FY2014 Consolidated Appropriations Act on January 1, 2014 (H.R. 3547/P.L. 113-73), Congress has approved appropriations for the past 13 years of war that total $1.6 trillion for military operations, base support, weapons maintenance, training of Afghan and Iraq security forces, reconstruction, foreign aid, embassy costs, and veterans’ health care for the war operations initiated since the 9/11 attacks.
War in the Middle East has been traumatic for the nation but profitable for defense contractors. Keep this in mind when thinking of market effects of the Paris attacks.
As Bloomberg reports, emerging economy stocks and currencies took a hit after the Paris attacks. Our concern with these economies is those nations that are or will be targets of terrorists and in danger of disintegration in the months and years to come. In this regard the BRICS nations are proposing a universal front to deal with terrorism according to the Economic Times.
Leaders of the BRICS grouping, including Indian Prime Minister Narendra Modi, today called for setting up an universal counter terrorism front without any pre-conditions to effectively deal with the terror menace.
“BRICS leaders believe it is necessary to set up a universal counter-terrorism front,” said a statement by the group of five emerging economies, quoting Russian Foreign Minister Sergey Lavrov.
Developing nations are hurt when investment falls and investment falls off when nations become disorganized and dangerous. To the extent that investors are afraid to invest, the market effects of the Paris attacks will be a selective reduction of foreign direct investment in various developing economies.