- Wealth PMS (50L+)
Over the weekend, news of the vicious attack by the militant group Hamas on Israeli civilians emerged. Going by initial reports of casualties, the ongoing event has added yet another sad chapter for the region.
One likely immediate question that emerges is what it means for investors, and what action (if any) is called for. This short note is our attempt to answer this question.
Since we are not geopolitical experts, we won’t even attempt to forecast how the next few weeks or months in the region will unfold, nor make predictions about where markets will head as a result.
What we do instead is look for existing research for insights on the history of geopolitical conflict and their impact on markets.
A cursory reading suggests that an instant negative impact derived from a specific geopolitical event occurs but it typically recovers over time. Nonetheless, the empirical evidence is again very modest and one of the main challenges is to isolate geopolitics as a return driver, since the S&P 500 index captures an enormous amount of information, i.e. market knowledge. In fact, geopolitics is only one information attribute and hence will likely be diluted by other information, particularly as time passes.
A separate analysis by Glenview Trust covered 29 different geopolitical crises starting with World War II and found, on average, stocks were higher three months after the geopolitical shock.6
On average, indices recover in nominal terms to pre-event levels, the gap between the performance after negative and positive event collapses, and performance begins to mean-revert for positive as well as negative events. Therefore, the effects of geopolitical events seem to last somewhere between one and three months.
The above research by State Street Global Advisors considered four markets of which India was one. Note this is for events occurring in or around the country.
The summary of what we found:
The implication for investors is clear:
To not anticipate prolonged market falls from geopolitical events irrespective of what the headlines say. Stay the course with your investment plan.
1 IMF – Geopolitics and Fragmentation Emerge as Serious Financial Stability Threats
2 Schroders – Measuring the impact of geopolitics on markets
3 State Street – How Does Geopolitics Affect Financial Markets?
4 Asymmetric impacts of geopolitical risk on stock markets: A comparative analysis of the E7 and G7 equities during the Russian-Ukrainian conflict
5 Impact of Geopolitical Risk on U.S. equities in the Information Technology & Communication Services Sectors
6 What history says about geopolitics and the market