by Andrey Stoychev
Trading in the financial markets has always been full of unexpected twists, many positive and negative emotions, fear and great hope. All these emotional and / or rational states carry with them the main thing we need to remember – risk. And here we are not talking about the risk of loss or even worse - the risk of bankruptcy. We are talking about risk that comes and goes along with unexpected events - financial crisis, health pandemic or war. Such moments are the most difficult for investors, traders or just enthusiastic speculators. Most such events are unexpected and no one is prepared for them, simply because few have previous similar experience from events. Or not quite…
From a scientific point of view, history is by far the most valuable means of preparation, or at least a guide to expectations. If we try to find something positive from the world events of the year, we should probably note that the war in Ukraine is relatively small, and we all hope that it stays within that framework and do not witness the expansion of the conflict. Anyway, for the last ten years we have witnessed a financial crisis, immediately after that unknown for the last decades health crisis and even while we are hesitant - whether we fought the Covid pandemic or not, Russia invaded Ukraine.
It is interesting, though, to see when the war began and whether it bears a resemblance to previous military actions around the world in the period 1929-1945. Before this historical period, the division between the West (mostly the United States) and the East (China) had a brutal economic battle, a struggle for geopolitical supremacy and a technological race. Pretty familiar, isn't it? The small and I hope the key difference is that now the world is much wiser, in solidarity, concerned and I would even say reasonable.
Lets now try to gather all pieces of the puzzle and based on the experience of history to review the best investment places and the best trade techniques during war. To the extent possible….
We would quite easily find two economic cycles which end up in similar way - central banks facilitate lending, give easy money, and this makes capital markets grow. Everyone expects some of this easy money and credit to enter this market, this is really happening and the prices of the leading indices are rising.
In the current situation, however, things are quite different, because even before the end of the second cycle we are entering the third and most of the levers of developed economies are already used or in operation. Not to mention that due to the high inflation part of the measures needed to be stopped – measures which under other equal conditions and in different situation would now be priority №1 to all central banks and finance ministries.
On the other hand, the First and the Second World War have provoked enormous and harrowing humanitarian, economical and psychological catastrophe which to this day leaves its mark and echoes in the countless historical buildings and technics used in one form or another in this cruel act of humanity. However, with the development of technology, modern potential warfare could have devastating consequences for our planet. In addition to the already known atomic bombs, there is the potential for the use of chemical and biological weapons, cyber attacks and a dozen other extremely dangerous and modern weapons of destruction. This is what makes the big difference with the past and the difficulty of using historical events for our current expectations.
Not only in military conflicts can we see that often small things grow into something bigger and bigger. Of course, we all hope that the local war, which is still being fought on the territory of Ukraine, will end soon, but the risk of escalation of the conflict is not small and with the prolongation of the fighting the probability also increases. If you look at it from the side, Russia is not economically strong enough to prolong this war much, but even before the operation led by Putin, it may have a strong enough ally (I can only think of China). Even if it is not so official, it still seems that the big winner at the moment is the largest country in Asia and the world. On the one hand, the West needs a market like China in both directions - to export and use products and services, and on the other hand Russia needs to increase its trade relations with countries outside the Western allies and logically China is first in the list.
From all that has been said so far, it is clear that it is quite difficult to make any investment decision based on history - the most logical, of course, is to look at European and American military and military-industrial companies and related to the military-industrial complex companies and to leading and very well-developed trade relations with the West Chinese companies, but isn't this too obvious? As a matter of fact, the only sure thing before the somewhat surprising war was that 2022 and probably 2023 will be some of the most difficult years for the financial markets in decades. High inflation and overblown debts of the leading economies had to change the policies of central banks sooner or later and make money more valuable, motivating more market participants to exit their investments.
I would approach a less unconventional way of seeking investment at such times. It is clear that compared to the middle of 2021, the levels of the leading indices are now attractive for purchase, oil and gas are at record highs, and cryptocurrencies are experiencing their second major stress test after 2017. In such very uncertain and unclear times in a long-term perspective, I would invest in assets available from anywhere in the world and at any time - sufficiently liquid and easily transferable. However, if we focus on something more traditional - real estate, for example - I would bet on top locations around the world, where it is clear that the economy will recover the fastest and life will develop most rapidly.
There are risks during the war when introducing different types of limits from local and international banks, and capital control in different countries and regions is quite possible, as we are now seeing in Russia, for example. We can also take another example of risk from Russia - the closure of financial markets for indefinite time - in other words, investment cannot be managed, which can have very serious consequences.
In conclusion, no matter how much we try to protect ourselves from the financial whirlwind - it will be very difficult to choose only the dry places in such a torrential rain. It is important to follow the above important principles and diversification and to know that the opportunities will soon be much greater, so it is good to be ready with free money to invest.