Financial markets: what impacts from war?

Freedom Finance Europe's analysis of major conflicts over the past 40 years

Historically – despite geopolitical crises – the major stock indexes have returned to a positive trend in the short term. This is according to Freedom Finance Europe’s analysis of major conflicts over the past 40 years in relation to financial markets.

Financial markets and war

Over the past 40 years, European indices – the DAX index is used as a benchmark – have demonstrated short-term pullbacks (a return, that is, of prices to previous levels) in prices in conjunction with various geopolitical events.

At the same time, within a month of the start of the episodes (wars, military operations, terrorist acts, etc…), in most cases, the index rose into the positive area (some examples: the September 11 attacks, the terrorist attacks in London and Madrid, and the military conflicts in Ukraine).

What impacts?

Israel – it is pointed out – is the EU’s 25th largest trading partner, accounting for only 0.8 percent of the EU’s total trade in goods in 2022.

That’s why, unless the conflict between Israel and Hamas involves new major participants (e.g., Iran), “we do not believe that the real effect on the European economy and European businesses will be significant,” the report writes.

Considering that the conflict in the Middle East “is likely to be limited in nature and will not have a significant impact on the EU, at the same time, considering an escalation scenario or a potential deterioration of the economic situation in the EU,” Bergamini points investors to the following strategies:

  • Increase the share of gold in the portfolio to 7-10%;

  • Rising geopolitical and/or recession risks will stimulate a decline in long-term bond yields. To increase portfolio protection, consider increasing the share of both long-term and short-term bonds to 25-35% instead of opting only for long-term bonds, which are usually considered safer;

  • Increasing the share of defensive sectors in the portfolio to 25-35%, including: utilities, healthcare and, to a lesser extent, the consumer sector;

  • Increasing the presence of defense sector companies in the portfolio to 10-20%. The defense sector could be among the beneficiaries of both increased geopolitical tensions and, considering recent statements by political leaders, could receive a boost as a result of increased EU military budgets.

Read also: A guide to financial instruments: what they are and which are the most common today

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