Russian-Ukrainian War: How Do Armed Conflicts Affect Stock Markets?

Wars, armed conflicts and military invasions are events that attract the attention of millions of people around the world. Hyperconnectivity and social networks have changed the way people access information and how it influences their decision-making process.

According to Renta4 SAB, this phenomenon should be taken into account if before the opening of the market we receive a notification on our cell phone confirming that Russia is invading Ukraine for the second time in less than a decade.

An armed conflict is a geopolitical event with a high economic impact for those involved, either due to the increase in public spending for military intervention, the economic sanctions that may be imposed or the definition of new commercial dynamics.

But how do armed conflicts affect stock market performance? To understand the effect of this type of event on listed securities, their behavior during similar periods in the past must be analyzed.

“If we analyze the behavior of the S&P500 index as a ‘proxy’ of the global stock markets at the moment of detonating the main armed conflicts of the last decade, we will observe that the real impact that these events generate in the market is not as much as it is in our subconscious”the company said in a report.

wars and markets

The attack on the Twin Towers on September 11, 2001 brought with it 20 years of US intervention in Afghanistan. At the beginning, a first shock caused the market to correct -4.9% in its first session after the attacks and accumulate a fall of -11.6% before beginning its recovery, which would only achieve 18 sessions.

“Not only did the stock market demonstrate its resilience in the face of geopolitical events, but in the 20 years that the military intervention lasted, the stock market reached a revaluation of almost 330%”noted the SAB.

During events like the Gulf War, which lasted six months, it took that same time to recover all the loss, and its maximum drop was 15.9%. For its part, the Korean War takes three years of conflict and takes less than half the time to recover losses than the Gulf War, where its maximum drop was 12.9%.

This market performance is explained by the fact that in the stock market we find companies whose income is hardly going to be compromised by the development of an armed conflict in a region of the world in which they do not have commercial activity.

Although it is true that the “market noise” can bring some volatility in the short term, it is not necessary to wait long to see how the prices of the shares return to normality, and then it is about taking advantage of these market inefficiencies to take positions at attractive prices and “rebates”.

“Once the impact that the conflict in Ukraine could have on the US stock market has been analysed, the same conclusion can be asked for other stock markets such as the Peruvian one. Saving some distances such as liquidity and the concentration of issuers in their respective indices, the logic to be applied would be the same”he explained.

However, one point to take into account is the behavior of China, the main importer of Peruvian metals such as copper. Until now, it has avoided taking a position in the conflict and has opted for a neutral position, thus avoiding the risk of possible economic sanctions by the US. If maintained, this position would not generate direct implications in other economies such as Peru’s.

From the North American side, what is ideal for the US at this time is a scenario of non-intervention since it is in a situation of uncontrolled inflation –a record for the last 40 years–, and is about to change the course of its monetary policy to try to control it, a context that does not invite one to think of financing a military campaign as the cost of its debt rises.

Exchange rate

Finally, how is the dollar behaving and how would it affect the Peruvian sol as a result of the war between Russia and Ukraine?

The escalation of tensions in recent weeks has affected currency markets. Usually, the US dollar and the Japanese yen are the currencies that have historically acted as a refuge in times of uncertainty and high volatility, at which time the yield of the 10-year US Treasury bond and the dollar tend to increase their correlation.

This movement indicates that many investors have chosen to avoid volatility and migrate to assets such as the dollar or US treasury bonds, instead of European debt and currency that currently have direct exposure to the performance of the armed conflict in Ukraine. Naturally, the aversion to volatility and risk make the dollar stronger, leaving currencies of emerging countries such as the Peruvian sol exposed.