How to navigate your share investments in times of war

Stay focused on your personal investment goals and strategy and remove the emotions from your decision making.

The war between Russia and Ukraine has already lasted longer than many would have thought, and we can only bemoan the unnecessary deaths, pain, suffering and destruction that comes with it. As someone recently said, “Wars don’t bring lasting peace, only lasting death”.

Putin also thought the war was going to be over in a few days’ time with a clean sweep of Ukraine, but under the leadership of President Volodymyr Zelensky, they have shown remarkable resistance. Many of Zelensky’s quotes will forever be recorded in the history books, most notably, for me, his words, to the US government when they asked him and Ukrainians to evacuate, replying, “I need ammunition, not a ride.”

Investors have also experienced a very difficult period since the start of 2022. In January, investors were propelled into a very turbulent environment when the Fed announced its intention to start easing liquidity to cool the highest inflation in about 40 years. Other uncertainties such as relatively high valuations and the uncertainty regarding the sustainability of high company profits also weighed on markets, especially offshore. It is therefore important to note that the S&P 500 had already decreased by around 10% before the war even started.

The war has sent stocks plunging even further once the full-scale Russian military invasion of Ukraine started. The Russian rouble went into a freefall weakening as much as 82% against the US dollar within just two weeks which has forced the Russian central bank to more than double its key interest rate from 9.5% to 20%. Russia invading Ukraine has therefore added to an already tense year, with investors selling first and asking questions later.

So, how do you approach your share investments in times of wars or geopolitical events (or any correction on stock markets for that matter)? Looking back at previous major geopolitical events, it is important to know that these events were usually short-term market issues.

LPL Research looked at 22 past geopolitical events since World War II. It found the average total drawdown on the S&P 500 was only 4.6%. On average, it took less than 20 days for markets to bottom and 43 days to recover all losses. It is so, looking at this graph, that larger conflicts in sensitive regions can last longer. No two events are the same, so no one knows how markets will respond in the coming weeks. At the time of writing this article, we were already on day 22 without any clarity of when the war will come to an end.

Further research from LPL suggests that, if the economy avoids a recession after a major geopolitical event, stocks usually do just fine. They looked at 37 major historical or geopolitical events since World War II and found that if there is no recession then stocks gain nearly 11% a year later. On the other hand, if there is a recession, stocks are down by about 11% a year later. According to the IMF, however, the world economy is expected to grow relatively strongly in 2022 and 2023 and therefore they don’t foresee a recession in the near future due to strong consumer demand.

Coming back to the question of how to approach your share investments in these uncertain times, keep these useful pointers in mind.

  • Firstly, it goes without saying that diversification between different shares is of utmost importance. Don’t put your hope on just a handful of shares.
  • While investors should be prepared for additional volatility, history does seem to suggest that share declines associated with geopolitical fears are generally temporary setbacks and a potential opportunity to buy at discounted prices, especially if one has a long-term view.
  • Do not just sell and ask questions later. Selling can stop short-term pain but cause major long-term damage. Selling in uncertain geopolitical events monetises losses. Market corrections are usually your best opportunity to invest for the future.
  • Stay focused on your personal investment goals and strategy and remove the emotions from your decision making. Emotional reactions remain the main enemy to long-term wealth creation.
  • Trying to time the market can cost you dearly. Do not sell and think you are going to wait for the war to be over and for markets to be safer. In most circumstances, the market will bounce back, and you have to buy back at higher levels. As Warren Buffet said: “It’s time in the market, not timing the market”. The graph below shows the devastating impact if you miss just a handful of the best days. Most of the best days also happen after the worst days. This occurrence also usually happens in the middle of a crisis which makes it even harder to predict. The Nasdaq, for example, increased by 3.6% on March 9 2022 in the midst of the war. The JSE, on March 16 2022, also in the midst of the war, increased by 4%.
  • Make sure your provision for income or any form of short-term needs is in place. Share investments are for the longer term.
  • It is the macro-economic picture and even more pertinently the prospects for company profit that tends to determine what happens to the market over the medium to longer-term, not wars or geopolitical events.
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Hennie Fourie

PSG Wealth Pretoria-East


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