Markets and wars

Russia's invasion of Ukraine has shocked the whole world. Putin launched a military campaign that is already causing many casualties (including civilians) and that, for now, does not seem to have a clear way out. NATO has responded by sanctioning Russia: limiting access to credit, freezing assets and bank accounts and restricting exports, among others.

We have seen stock markets fall, volatility rise and safe-haven assets revalue in general. What can we expect from the markets in these moments of geopolitical conflict?

Looking at history, we see that the evidence is inconclusive. In World War I, the U.S. stock market fell 30% in the 6 months following the start of the conflict. However, in the 1914-1918 period it averaged an 8.7% annual rise, in line with the long-term return. On the other hand, when Hitler invaded Poland for World War II, the U.S. stock index posted a 10% rise. Between 1939 and 1945 the return exceeded 7%, only slightly lower than the structural return for that asset class. Nonetheless, there are also examples of negative short-term effects such as the Gulf War (-13%) and the attack on the Twin Towers (-15%).

Risk assets suffer losses in moments of uncertainty and we don't know with certainty what will happen in this conflict. However, the future is unpredictable, the market is cold and always looks one step ahead. The best decision is to maintain a diversified portfolio and avoid making abrupt changes to the investment policy amid the turbulence.

This column was originally published in the newspaper La Segunda on March 3, 2022 [LINK]