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Volunteers in a Kyiv Territorial Defence unit train in a forest near Kyiv, Ukraine, on January 22. Across Ukraine, thousands of civilians are participating in such groups to receive basic combat training and, in time of war, would be under direct command of the Ukrainian military. Photo: TNS
Opinion
The View
by Richard Harris
The View
by Richard Harris

Ukraine crisis: why investors should fear inflation and interest rate rises, not war

  • Geopolitical tensions are not always bad for stock markets, which have a history of going up in times of conflict
  • Inflation, higher interest rates and reductions in central bank liquidity will do more damage to economies than a territorial war in Ukraine
Richard Harris
Richard Harris
Why you can trust SCMP
I remember the exact moment the first Gulf war began. I was managing money for Jardine Fleming in 1991. We had been waiting nearly six months, watching the build-up of military might in the Middle East and waiting to see how Iraqi leader Saddam Hussein would be thrown out of Kuwait. The Hang Seng Index had fallen sharply over that period.
Our director in Bahrain was Frank Gardner, now security correspondent for the BBC. He was woken up at midnight by jets roaring over his house. Being a former military man, he knew the difference between a jet on a training run and a fully armed one, so he sent a note to our investment desk in Tokyo that said, “I think it’s started!”

The Japan team – the only office awake at that time around the world – were in the morning meeting and didn’t immediately get the message. This was in prehistoric, pre-email times. A secretary put a message slip on the boss’ desk. Another secretary came along five minutes later and put a piece of paper on top of the first, and so on.

Just before lunch, the team leader finally got to the bottom of the pile to see the message, but by then the whole world knew. He said that if he had got the message on time, he would have sold. In fact, the Hong Kong market was up more than 40 per cent by the end of the year, so he should have bought.

Nathaniel Rothschild knew something about wars. During the Napoleonic wars, he reportedly coined the phrase, “buy to the sound of cannons, sell to the sound of trumpets”. It was as accurate in 1991 as it was in 1812, when Napoleon Bonaparte advanced on Russia.

What if Napoleon had won battle of Waterloo

However, Rothschild also benefited from the trumpets. To protect his real business of transporting gold to pay the troops, he had a communications system of messengers, horses, carrier pigeons and fast boats at the ready.

He was first with the news in 1815 that the Duke of Wellington had been victorious at the Battle of Waterloo, beating the official messenger. The story goes that no one in London believed him, so he took advantage and made a killing on the stock market.

Smartphone notifications and market manipulation regulations have made that kind of scoop obsolete. However, there is still much information contained within the little-used resource of financial narratives that swirl around the markets.
One quick way to extract information is by using Google Trends. The graph below shows the number of internet searches for Ukraine and Russia to the end of January. Ukraine has been in the news for a while now, but searches for Ukraine and Russia have begun to move together.
Does the coordinated movement of the two indicators suggest that the crowd in the marketplace thinks some kind of intervention is likely, or is the media feeding a frenzy of interest? Either way, interest is high and indicates the topic might be more serious than investors expect.

Information is power – it just depends on what you do with it. Geopolitical squabbles can have an unpredictable influence on markets as the shocks and outcomes can be completely binary. Even Wellington reportedly described his victory at Waterloo as a “close-run thing”.

My base case investment scenario is that Russian President Vladimir Putin will not invade Ukraine, but it is a close-run thing. I would guess that even he doesn’t know. Even if Russia makes an incursion into Ukraine, new sanctions are unlikely to be any more effective than the current ones. Threats to disinvest from Russian projects are going to become a reality in any case.

Today’s leaders have not experienced the horrors of all-out war. Even if they disregard the catastrophic effect on their own people, they know that there is no winner in direct superpower conflict.

02:27

Amid Russian troop build-up in Belarus, Ukrainian soldiers doubt good result in Kremlin-US talks

Amid Russian troop build-up in Belarus, Ukrainian soldiers doubt good result in Kremlin-US talks

The narrative indicates high tensions in Ukraine, but it is just a localised spike in levels that are the highest since the Cold War. Yet, tension is not always bad for stock markets. Prices might show great volatility as the news story progresses, but markets regularly go up in times of conflict.

The US market surged after the country’s entry into World War II and again during the war in Vietnam. Conflict inspires creativity and productivity, as well as a major investment into the military-industrial complex. It might be perverse, but it is positive for many share prices.

Investors cannot invest just for the worst-case scenario because, by definition, it is one of the least likely outcomes. Rampant inflation, the debasement of money, the raising of interest rates and the reduction in central bank liquidity will do far more damage to economies than a territorial war in Ukraine.

Nevertheless, even though equities are expensive, liquidity is still high, the US Federal Reserve still has the will and the firepower to support markets, and early-stage inflation is more likely in the short term to assist companies rather than damage them. But it is a close-run thing.

Richard Harris is chief executive of Port Shelter Investment and is a veteran investment manager, banker, writer and broadcaster, and financial expert witness

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