However, when there is a pre-war phase, an increase in the war likelihood tends to decrease stocks prices, until the war ultimately happens, and stocks come back up again.
This phenomenon is known as ‘the war puzzle’, and there is no clear explanation as to why stocks increase significantly when war eventually breaks out after a preamble.
In recent weeks, defence analysts have been forecasting the potential avenues that this conflict could proceed down as well as the propensity for unexpected consequences and escalation to occur in the fog of war. Perhaps stocks also have a mind of their own in the midst of conflict.
A moral turn for investors?
I have already briefly acknowledged the fact that companies are increasingly turning away from Moscow. So far, 150 companies have completely withdrawn business with Russia – the likes of BP and Shell have divested massive assets, while companies like McDonald’s and Starbucks have ceased operations in Russia while continuing to pay dedicated workers.
This could potentially mark a moral turn within the investment landscape. Indeed, moving ahead, those who continue to do business with Russia may do so at a very high cost, as consumers and investors alike may boycott these companies in protest, which will have a knock-on effect on stock valuations.
Of course, the sanctions placed on Russia do not exist in a void. In addition to some nuclear sabre rattling, Putin has claimed that western sanctions are “akin to an act of war”, and as such, many experts expect the Kremlin to take retaliatory measures like cyberattacks to ward off any further intervention from EU and Nato members.
In terms of how this posturing translates to the markets, defence and cybersecurity stocks saw a sharp rise in value in the immediate response to Russia’s move into Ukraine, as investors took note of pledges made by the EU and the Biden administration to boost defence spending, as well as their warnings of a potential cyber blitzkrieg.
Raytheon Technologies, the US defence giant and the maker of the Stinger ground-to-air missile that Germany has pledged to supply Ukrainian forces with, saw its shares increase more than 10 per cent in the immediate aftershock of the crisis, while the Global X Cybersecurity exchange-traded fund rose 3.6 per cent.
Indeed, heightened geopolitical tension will continue to provide a strong tailwind for cybersecurity stocks.
An more optimistic read on the current situation would posit that the banning of Russian oil may fast-track the transition to net-zero, which theoretically would translate into an uptick in environmental, social and governance stocks and more eco-friendly energy solutions in the medium to long term, such as nuclear energy, biogas, biomethane and low-carbon hydrogen via electrolysis, as well as the technologies that will eventually make these goals a reality.
