Are we on the brink of global war? Historian Niall Ferguson once said, “If you do not prepare for war you shall not have peace”.
Winston Churchill realised that the Second World War could have been avoided with timely action, highlighting the importance of deterrent measures before conflicts began.
In today’s volatile times, it’s important to revisit these lessons again.
Yet, here we are again, facing the unthinkable prospect of war in Europe.
Human nature often leads to conflict when interests clash, especially when one side believes it has the upper hand.
The development of nuclear weapons, first tested in Japan during World War II, has since proliferated, with countries like Iran and China pursuing these deadly arsenals.
The risk is clear. The use of nuclear weapons could obliterate civilisation and humanity.
Two nuclear armed powers are deciding the destination of Ukraine. The Russian one is already directly involved in the war while the US supports Ukraine through proxy means.
Three significant risks could escalate the situation further:
1. Iran’s Nuclear Ambitions: If Iran successfully develops nuclear weapons and deploys them via proxies like Hezbollah against Israel, will Western nations retaliate with their nuclear arsenal to defend Israel?
2. Russian Aggression: A Russian cruise missile recently breached NATO airspace, flying over Poland for 39 seconds. This is the second such incident since the war began. With NATO increasing its defensive support for Ukraine, tensions are rising, potentially deterring Russia but also complicating peace prospects.
3. China-Taiwan Tensions: Beyond Russia, the geopolitical tension between China and Taiwan poses a significant risk. CIA Director William Burns revealed that Xi Jinping has instructed the Chinese People’s Liberation Army to prepare for an invasion of Taiwan by 2027. Should China invade, how will the West respond, and to what extent?
China’s economic importance to Western countries is immense, with its share of world trade being over seven times larger than Russia’s.
China accounts for about 19% of American manufactured goods imports.
Major companies like Apple, Nvidia, and Arista Networks rely heavily on manufacturing in China and Taiwan. A conflict here would severely impact the stock market, especially in the short term.
President Biden assured Ukraine that freedom is priceless and worth fighting for, for as long as it takes.
The biggest risk is nuclear war which will have devastating consequences in the world.
As Winston Churchill once said, “Those that fail to learn from history are doomed to repeat it.”
Whilst it’s difficult to guess, if you place an enemy in deadly desperation and leave them without an option, we might have to think again about what they may do.
There is a saying, “There’s no war that will end all wars” which rings true in today’s unstable world.
Investors are rightfully concerned about whether this conflict will escalate beyond Ukraine and draw NATO into a broader war.
Despite military strategists’ various scenarios, the predictability of wars remains incalculable.
For instance, Niall Ferguson in his book The Pity of War wrote that more British soldiers were killed in the first day of the Battle of the Somme than Americans in the Vietnam War and that the total British fatalities in that single battle — some 420,000 — exceeded the entire number of American fatalities for both World Wars.
This brings us to the question of how current geopolitical tensions might affect the market.
Let’s look at historically what the market did after the wars and the lessons that can guide us to make better investment decisions.
Source: First Trust
As Mark Twain once said, “History does not repeat itself, but it often rhymes”.
As the above graph shows, wars have very minimal effect on stock market performance other than an initial short term reduction in share values. The rise in value of stock markets has proven to be inexorable despite many wars over the years.
The reality is the world is a complex and uncertain place. We can not know the future with absolute certainty but what we can do is make the best investment decision that can survive several scenarios.
The core investment approach we use is rooted in historical data and is driven by our belief that only a handful of companies, led by visionary leaders, can create monumental wealth. You can achieve this by being patient and investing in an economy or sector that will thrive for many years to come. That’s what really matters.
Awet Ghirmay, Head of Investment Research
If you want to learn more about this topic, please find the link here.
More information about our fund can be found here: Hargreaves Lansdown or AJ Bell
Risk warnings
The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
