How War Affects You as an Investor

Wars not only cause widescale humanitarian crises and political insecurity, but also have a direct impact on economies. In many cases, even countries which are not directly involved in the war are caught up in its economic wake. This article from moneyland.ch explains how wars affect investments.

Inflation

Wars usually fuel periods of inflation. There are a number of reasons for this. For one thing, countries involved in the war often print money at much higher rates in order to finance their militaries. This directly devaluates their currency.

But the destruction of manufacturing plants and infrastructure (bridges, for example) can also contribute to inflation. If the production of goods is halted because of the war, then the supply may no longer match the demand. Coupled with the greater supply of money, shortages of goods can result in hyperinflation – such as that seen in Austria after the first world war.

War also often leads to spikes in sanctions and protectionism, which also drives up prices (energy prices, for example).

Even countries which are not directly involved in the fighting may be hit with inflation. For countries like Switzerland, which depend heavily on trade with other nations, importing goods may become more difficult and expensive. As a consequence, the supply of these goods shrinks. When demand does not shrink to match supply, prices go up. For you as a consumer, this means the same amount of money gets you less of the things you need or want than before the war.

Interest rates

Wars can cause interest rates to shoot up. This is an indirect consequence of inflation: The central bank of a country experiencing inflation may try to counter it by raising its interest rates. For example, the Central Bank of Russian Federation doubled its interest rate to 20 percent after the entry the ruble lost nearly one-third of its value against other currencies following the escalation of the Ukraine conflict in 2022.

The high interest rates do not automatically make holding your wealth in savings accounts a good move. On the contrary, the currency devaluation which resulted in higher interest rates being introduced is often so large that you lose actual wealth in spite of the high yields. Because of this, many investors flee to tangible assets in times of war.

Commodities

Basic raw materials (commodities) like crude oil, metals, and grains, normally gain in value during wars. Which goods experience the biggest price hikes depends on which countries are involved in a war. For example, the prices of grains skyrocketed when the Russian army entered Ukraine in early 2022 because both countries are major producers of basic foodstuffs. The American Civil War, on the other hand, caused price explosions in cotton markets.

Wars affecting countries which produce crude-oil and natural gas often result in energy cost spikes which directly impact most consumers. Damage to extraction sites and refineries can result in production cuts and losses. The same applies to other commodities. The result is that you as the consumer have to pay more for fuel, heating, and many other things.

Oil-producing countries which are not directly affected by a war – but support one of the warring parties economically or ideologically – may use commodities as a political tool. For example, countries may choose to place embargos or boycotts on petroleum from the party which they oppose, or vice-versa. As a result, countries affected by these embargos may experience shortages which can push up prices. Major commodities producers may also choose to flood the market in order to drive down prices and thus damage their competitor’s profits.

Gold

The supply of gold is usually less affected by wars than that of other commodities, but the precious metal is usually one of the biggest winners among wartime investments. In the event that inflation spirals out of control, your money may become practically worthless before you are able to exchange it for goods or services. On the contrary, Gold is seen as a tool for protecting wealth from inflation. That makes it attractive both to the people who are directly affected by the war, and to investors. Because gold is considered valuable in every part of the world, it provides a relatively stable means of exchange.

Normally, the price of gold already goes up ahead of military conflicts, and particularly when inflation is present. As investors take precautions to protect their wealth against worst-case scenarios, demand for gold surges, and so does its price.

The shorter the conflict is expected to last, the less extreme the hikes in the gold price are. In many cases, the price of gold normalizes once a clear end of the war is in sight, as investors begin to move their wealth into riskier asset classes to take advantage of possible post-war recoveries.

Stocks

Stock markets are generally the biggest losers during wartime. The insecurity and limitations on trade push down stock prices, regardless of whether a country is directly involved in the war or simply has economic ties with affected regions. As a general rule, the more directly a market is affected by a war, and the smaller the chances of a country winning the war are, the bigger the negative impacts on its stock market are.

Of course, there are also stocks which profit from war. The arms industry tends to flourish during wartime. This is primarily true for companies whose production plants are not located in war-torn regions – as manufacturers in the affected country may have to stop production once the war breaks out.

Tendentially, defensive stocks hold their value somewhat better than other stocks. Defensive stocks include companies which deal in foodstuffs, pharmaceuticals, and telecom services. These companies tend to be less affected because demand for their products usually remains relatively stable during wartime.

In countries were fighting takes place, stock trading may no longer be possible. If regulated stock exchanges are forced to cease operations because of the war, private investors may be cut off from that market altogether. They may not be able to sell their shares in companies in that country to get needed cash or to exit their investment before prices crash. Germany closed its stock exchanges towards the end of the Second World War, when the war turned against it. Its stock market remained closed for many years after Germany surrendered. When exchanges finally reopened in the late 1940s, stock prices almost completely collapsed.

In the past, when the fear of war lingered high over longer periods of time, the big losses on the stock market occurred before the war actually broker out. In fact, a study by the Swiss Finance Institute shows that returns actually climbed when the war eventually began. That means stock markets trend downwards when the probability of war is high. However, if the war does break out (probability reaches 100 percent), then prices take an upward turn. But if the period of tension leading up to the war is relatively short, then the downward trend continues for some time after the conflict actually begins.

In spite of this effect, stock markets usually recover quickly from losses resulting from war, as shown by the historical return calculator on moneyland.ch. For example, if you had invested in Swiss stocks in 1939, shortly before the outbreak of the Second World War, you would have earned a 3.87 percent return by 1946, accounting for inflation.

Bonds

Governments affected by war normally want to borrow more money in order to finance their militaries. The nominal yields of government bonds from these countries go up, but devaluation of the denominating currency may surpass even these higher interest rates. As governments continue to increase interest rates, the value of existing bonds with lower rates goes down.

Government bonds are normally considered to be relatively secure because the chances of a government going bankrupt are small – at least for most countries. But the risk of defaults is much higher during wartime. If a country’s government is ousted and replaced by a new government at the end of the war, the new government may not recognize loans taken by the former government. In this case, investors may lose the money which they invested in bond, along with promised coupon payments.

Something unique to wartime is that many countries affected by war issue war bonds. These bonds are issued specifically to raise money for the army. Because investing in bonds during wars often does not pay off for investors, governments promote war bonds as a form of patriotic fundraiser – a chance to support the country’s war efforts, with profit taking a back seat. But it is still possible to earn positive returns through war bond investments. For example, the Swiss defense bonds issued in 1936 delivered a real return thanks to the devaluation of the Swiss franc.

Currencies

Holding wealth in the currency of one of the affected countries is rarely a good move, because the inflation caused by war can result in huge losses. If the government ends up being ousted, and its financial system with it, your investment could become worthless. If you want to hold wealth in cash, it is normally better to keep currencies from uninvolved countries.

Investors who want to avoid the risks associated with a war can focus on regions which are not involved in the conflict. For example, when Europe is affected by a war which has little or no impact on the United States, then American assets become more attractive for European investors. Increased investment in the United States results in a strengthening of the US dollar.

The Swiss franc has long been considered a safe haven, and is often used to preserve wealth during times of crisis. Largescale buying of Swiss francs is particularly common ahead of conflicts. This demand for the franc drives up its price in relation to other currencies like the euro and US dollar.

Cryptocurrencies

The effects of war on cryptocurrencies is difficult to determine, as blockchain technology is a relatively new invention. This sets cryptocurrencies apart from other asset classes for which there is historical data from the two world wars.

Assumptions of how cryptocurrency prices will react to wars are remarkably diverse. Some market observers believe that cryptocurrencies will respond to wars in a similar way to stocks because they are considered high-risk assets. In times of insecurity, most investors will avoid taking risks.

Many cryptocurrency proponents, on the other hand, argue that cryptocurrencies can be a sensible investment in times of crisis. The assumption is that cryptocurrencies could be much more stable than conventional currencies because they are not denominated by these and are not controlled by any one party. As such, they should not be directly affected by inflation. Theoretically, cryptocurrencies could be used to soften the blow of economic sanctions, as they enable trade outside of traditional financial centers. Additionally, collectible non-fungible tokens (NFTs) can be issued and sold by governments in order to finance wars in a similar way to war bonds.

Only time will tell which of these assumptions actually ends up holding water. What bitcoin’s price performance over the past ten years has shown is that while economic and military conflicts (and worries about possible conflicts) have not always led to price drops, they do normally result in heightened volatility.

Real estate

Wars can result in a complete crash of real estate prices in countries where unrest take place. The risk of properties being damaged in the fighting is just one reason for this. Another reason is that if residents begin to leave disputed areas in droves, demand for housing and other immovable property will collapse. Depending on how the conflict develops, there is also the risk of title deeds for property not being recognized by a new government.

In severe cases, it can take decades for property prices to recover. For example, the German real estate market only regained its pre-World War I levels in the 1960s. In Switzerland, on the other hand, property prices had already climbed slightly above pre-war levels before the start of the Second World War – but then collapsed again.

The exact opposite may apply to real estate markets which are far from conflict zones. As the war drives up the cost of new construction, property prices may skyrocket. Another factor which can push up the price of property is the arrival of refugees, which can significantly raise demand for housing.

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