The Morbid Reality of How Investors Profit from War
When we think of war, we should be thinking of personal safety rather than the safety of capital. At the end of the day people’s lives matter more than money. However, when global conflicts arise, they are often effective ways to protect your money, and in fact ways to find opportunity for capital appreciation. With the developing events going on in Israel and Gaza it leads me to believe that this is a time to look back in history and to give some of us some more context about what we should expect to see.
Historically, when there is escalated global conflict commodity prices rise as a result. As a person’s currency depreciates they look to tangibles items like as gold that hold value. However, there are more common commodities such as food and specialized metals that will increase in price because of the scarcity of the resource, especially if the region of source is associated with the war or impedes trade routes. An example of this is when the world leader in palladium production, Russia, started invading Ukraine palladium prices spiked 76% from December 2021 to February 2022 according to Factset.
Oil volatility has been something that has also been at the forefront of global crisis. Especially when the conflict occurs in the middle east where many of the world’s largest oil producers are located. An example of this previously has been in the Persian Gulf war in 1990 when Iraq invaded Kuwait. Iraq was the 7th largest oil producer at the time accounting for 3% of global production. An embargo was immediately placed on them by the UN and in the month proceeding the global oil prices rose 90% according to Factset. Many investors often use oil as a hedge so when global crisis is prevalent it plays a vital part in increased demand.
As many would suspect, another large beneficiary of global conflict is defense companies. We can look to US Defense companies during periods when the US was involved in conflicts and see the results for ourselves. During the 6-month period of the Persian Gulf War (Aug 2nd 1990- Feb 28th 1991) US defense giants Northrop Grumman (NOC) and Lockheed Martin (LMT) were both up over 30% while the S&P500 was down -4.4%. In the year following 9/11 we also see the same trend for defense companies as the war on terror was announced with these two major defense contractors gaining 53% and 72% as opposed to the S&P500 which down -17% over the same period according to Factset.
It is important to note that in the period following a war's conclusion a significant number of these profitable areas have seen periods of downturn as there becomes more certainty in the market. Thus, it is in the times of conflict when we see significant appreciation so that is the optimal time to best invested in these areas with confidence. It is a lot harder to predict trends in these assets when there is not large macro events driving increased demand for the products.
Conclusion
Global conflict is something that we morally should all try to prevent. As investors it is vital to understand what is going on in the world and position appropriately to mitigate loss. Doing this allows us to understand what areas tend to outperform through similar historical times and can help offer clarity to help us navigate through the present and invest mindfully.
Fergus Washington-Smith is an Investment Analyst at Aurora Asset Management, an Indianapolis-based subsidiary of Aurora Financial Strategies which is located in Kokomo, IN. He can be reached via email at fergus@auroramgt.com. Investment Advisory Services are offered through BCGM Wealth Management, LLC, a SEC registered investment adviser. This blog does not constitute advice. This is not an offer to buy or sell securities. Advisor is not licensed in all states. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. BCGM Wealth Management, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. Clients may own positions in the securities discussed.
