Russia-Ukraine crisis: why investors should buy the dip during periods of turmoil

History suggests that markets behave in a bullish pattern during wars

A trader at the New York Stock Exchange. Investors have many issues to worry about today, such as inflation, interest rate increases, Covid-19-related disruptions and the threat of war. AP

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“Buy to the sound of cannons, sell to the sound of trumpets,” financier and banker Nathan Mayer Rothschild said in 1810.

When Russia launched a military offensive against Ukraine, it sent global markets into a tailspin. Market fearmongers suggest you should sell and run for the hills.

Others believe this is the beginning of World War Three. Some fear that the cloud of war may fuel inflationary pressures even further, leading to another Great Depression.

Others believe markets have not yet bottomed out and advise against ploughing your savings into equities today. Look around and you will find an abundance of gloomy forecasts.

However, no one knows what will happen next. This begs the question — how do investors navigate during these uncertain times?

It is important that investors look back at history and study how the market behaved during similar crises.

Military offensives and market reaction

In reaction to the news of the Russian invasion of Ukraine on February 24, the S&P 500 opened 2 per cent down but closed the day in positive territory. More impressively, the index gained another 2 per cent on February 25, despite expectations that investors would not carry headline risk into the weekend.

However, it was counterintuitive that energy stocks closed only marginally higher over this period despite expectations of massive sanctions to disrupt Russian oil supply.

Technology stocks, which were expected to bear the brunt of selling, instead registered strong buying interest. Could this have been predicted?

Although the reaction may seem bewildering, history reveals that today's markets seem to be following a familiar pattern that also played out during previous military offensives globally.

One year after the US intervention in the Gulf War in 1991, for instance, the S&P 500 was up 30 per cent. The index was also up 15 per cent one year after Russia’s 2014 intervention in Crimea.

It appears that markets follow a “sell the rumour, buy the news” script often during times of war.

Wars tend to be bullish for markets, attesting to Mr Rothschild’s quote from more than two centuries ago. Armed with this perspective of history, investors should be well-equipped to navigate a course through these perilous markets.

What the market gives, it takes away

This year has not been an easy ride. Global markets are suffering a hangover after enjoying a three-year sugar rush of strong asset returns.

There seems to be a lot to worry about today: inflation spiralling out of control, interest rate increases by the US Federal Reserve, Covid-19-related disruptions and now, the threat of war.

Investors who entered the market during the past two years have become accustomed to easy money and seeing a smooth return curve. However, with increasing volatility whipsawing their investment accounts, they find themselves in uncharted waters.

The Russian-Ukraine conflict is expected to exacerbate volatility even further.

Most investors have either lost all their profits or are significantly underwater on their investments.

However, what the new crop of investors do not realise is that the past two years were an anomaly. What they are experiencing now is the normal nature of markets — periods of quiet followed by bouts of volatility.

Stay the course

Against this backdrop, investors are now left second-guessing the optimal way to position themselves.

When in doubt, zoom out. Stretch out your investment time frame and let your investment horizon, return objectives and risk tolerance dictate your asset allocation decisions.

Whatever you do, do not panic. Although the reason may be different each time, it is quite normal for equity markets to undergo a 10 per cent to 15 per cent correction in any given year (except for rare instances when the correction turns into a bear market and plummets more than 20 per cent).

Similar sell-offs have proven to be very profitable buy points in the past and should be taken as an opportunity to build long-term allocations in companies with bright growth prospects.

The big picture

There is no telling how long the current market uncertainty will prevail or how low the market will go. However, over the long term, markets tend to trend up and to the right.

Equities, which tend to outperform other asset classes over the long run, have historically recorded an average of about 6 per cent to 10 per cent annual returns.

If you have a long horizon and are willing to stomach interim volatility, do what most successful investors have done time and time again — buy to the sound of cannons.

Imran Khan is a portfolio manager at Entrust Capital