Geopolitical crisis and its effects on the stock market

DNHN - History from 29 geopolitical crises since World War II shows that the volatility of the stock market due to the effects of the crisis is significant, especially events related to war because the situation changes from hour to hour...

The fact that President Vladimir Putin has just recognized the independence of two breakaway regions in eastern Ukraine has caused panic in the stock markets to explode.

Because of the significance of this event as a turning point, it can lead to major economic consequences. If institutional investors have their tactics, how should individual investors act?

A HISTORY REVIEW OF THE GEOLOGICAL CRISIS

In a recent interview with Reuters, Glenview Trust Co.'s Chief Investment Officer. reviewed 29 geopolitical crises since World War II and found that, on average, after three months, stock indexes have recovered and are higher than they were before the crisis. Not only that, 66% of these recovered after just one month.

Events such as the Gulf war in 1991, the events of September 11, 2001, the Iraq war in 2003, or Russia's occupation of Crimea (Ukraine), after 1 month, the S&P 500 index returned to near the previous level or surpassed.

Another study by LPL Research on the link between the S&P 500 and geopolitical crises also found that, on average, these events cause the market to drop by up to 5%, taking an average of 22 trading days for the market to fall to the bottom and 47 days to fully recover. Particularly on the day of the event, the average market decreased by 1.2%, especially the September 11, 2001 event with a decrease of 4.9,% and before that was the North Korea - South Korea event on June 25, 1950, when the market fell 5.4%.

Thus, in the short term, the volatility of the market due to the impact of the crisis is significant, especially events related to war, because the situation changes from hour to hour: neither party know the other party's next move. However, in the longer term, looking at the annual time frame, the impact of these events would be blurred without a large-scale economic crisis.

TRANSMISSION IMPACTS THROUGH THE GOODS MARKET

When a geopolitical crisis occurs, its effect is most pronounced on commodity markets such as oil and gold. Conflicts around the world so far are more or less related to the issue of energy resources. Tensions will disrupt supply and oil prices will naturally rise, and gold is often seen as a safe-haven asset in times of uncertainty.

The increase in oil prices is positive for mining and related businesses, but on a large scale, the impact of rising oil prices on the stock market, in general, is still a matter of uncertainty.

According to common logic, an increase in oil prices will cause input costs in many industries to increase, and an increase in prices will lead to increased inflation. Since then interest rates will increase and stock prices will be pressured to decrease. However, past data through many studies show that the correlation between oil prices and the stock market is not clear: there are periods in the opposite direction, there are periods in the same direction but with a weak correlation coefficient.

The crisis in Ukraine is complicated by the oil and natural gas market between Russia and Europe. Both sides need each other because Europe has not yet been able to have a better alternative supply and Russia does not have another source of customers.

Therefore, the tension in Ukraine may create drama in the short term, but the parties will soon find a compromise solution.

WHAT SHOULD PERSONAL INVESTORS DO?

In events like this, the volatility of the market is significant, because the information changes hourly. That is why only professional investment groups have enough information and resources to implement their strategies: they sell strongly to wait for the market to recover, or sell strongly to create noise, and wasfor some panic selling, they have the opportunity to buy at lower prices, or reverse long/short positions continuously.

For individual investors, choosing the right time to enter/exit the market is almost impossible. If anyone guesses correctly, it is mostly luck. That's why many experts advise investors to stay calm, review their investment goals and duration. If the investment horizon is every year, then events like this shouldn't fall into the panic trap.

Instead, take advantage of sharp price drops to buy the dip of performing investments.

As for the Vietnamese stock market, the degree of connection with the world market is not strong, so the information, whether positive or negative from the outside, needs to be placed in the context of the Vietnamese economy and each industry, and each specific enterprise. Because while the market index is falling, there are still businesses that can survive and develop, and vice versa.

Dung Anh