What War Can Do To Wealth (And Investments) 

Wealth and investments are often thought of as being stable and unchanging. But war can have a devastating effect on their value. In this week's blog, we explore how war can impact your wealth and investments, and what you can do to protect your assets using gold.

Peace is rarer than war, but often wars can feel removed from the comforts of western democracies. The daily atrocities that have dominated the news since Russian President Vladimir Putin decided to invade Ukraine are hard to fathom in a comfortable home in the UK. And while we should all be doing what we can to support the aid agencies on the ground in Ukraine, on a personal level the impact of war on wealth and investments is a necessary consideration.

Global stocks & financial markets

The uncertainty of war always has an impact on stock markets, although the severity depends on the perception of the risk. International news of the invasion of Kuwait by Iraq in 1990 sent the S&P 500 stock index down 18% and oil prices doubled, although markets calmed somewhat when US forces began to amass on the border ahead of Operation Desert Storm. The state of the market before war will also impact how dramatically it moves, for example, the dot com bubble had already depressed stocks before the US invaded Iraq in 2003.

With falling coronavirus cases, equities had climbed out of their pandemic slump in the UK and surged well above that level in the US before heightened tensions in eastern Ukraine began to escalate on the Russia/Ukraine border. Since then, stock markets have fallen as the escalating war has increased uncertainty and volatility.

It’s not just in Europe that concerns about fuel shortages and rapidly increasing prices are affecting market outlooks. Crude oil prices jumped to hit 14-year highs in early March over uncertainty about Russian Oil and other Middle Eastern suppliers.

Stocks have continued to be very volatile as the war rumbles on, impacted by this uncertainty but also a long list of other issues including the pandemic hangover of debt and inflation, fuel prices, pay squeezes, savings rates and the wider geopolitical implications of the war. The FTSE 350 lost 10% in the month between early February and early March, although it is currently down just under 7% from its February peak.

Most people have at least some, possibly a lot of their assets in the market and the volatility can be value destructive, especially if they need to realise their assets now, for example, if they reach pension age.

The effect of war on business

War can have a positive effect on businesses if they are in the market for conflict paraphernalia like guns and tanks, but often the fallout for the wider business world reflects the economic strain that even distant wars create.

Under pressure from increased supply chain costs, increased energy prices and inflationary pressure from the rising price of fuel and other goods may stifle corporate growth, and could also lower their risk appetite and decrease mergers and acquisitions activity. Food producers may be hit by the already soaring fertilizer prices, a large proportion of which is manufactured in Russia.

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Other companies may suffer the fallout of economic sanctions, for example, companies that lease commercial aircraft to Russian airlines may find it hard to repossess their assets after cutting spare part supplies in response to the crisis.

Business failures or curtailments have an impact on pension fund investments, stock markets and the health of the wider economy, affecting investments in many sectors.

Property market volatility

The war in Ukraine could have a substantial impact on the property market in the UK according to a report by Knight Frank, although the fallout will only become clear in time. The report forecasts a rise in mortgage rates and a very sharp squeeze on household incomes. The longer-term impact will depend on how long the conflict goes on and whether it spreads further than the Ukraine border.

The income squeeze caused by inflation (which was on the rise even before fuel prices spiked) may have the greatest impact on property demand. Meanwhile, in London where the high-end property is a popular investment for Russian investors, the sanctions against oligarchs may also have an effect on this specific part of the UK property market.  

Investors’ bank savings

With inflation already running at long-term highs and bank interest rates still locked at long-term lows, bank savings were already losing value. The Ukraine war has pushed inflationary pressure even higher, particularly on food and fuel, and there are no savings accounts that can keep up.

Bank exposure to the fallout of Russian sanctions is also a concern, as is the economic impact on banks of a global economic downturn. The UK government provides a deposit guarantee scheme that covers up to £85,000 of savings, but nothing further in the event of a bank collapse. There will always be counterparty risk with bank savings, and the low-interest rates and high inflation make this a value destructive option for investments.

How bad is inflation?

The next monthly inflation rate indicator is due to be published on 23 March 2022 and the consumer price index is expected to rise above the 5.4% seen in the 12 months to January 2022. The retail price index, which includes mortgage interest payments was higher still, at 7.8%.

A Reuters poll found CPI inflation is expected to peak at 7.7% in the next quarter and will likely take until next year to fall back to the Bank of England’s target level. Some analysts are even more pessimistic. Goldman Sachs expects inflation to reach 9.5% in October, and KPMG thinks it will peak at double digits.

Bank of England announces higher interest rates

Breaking news on interest rates and projected inflation hit as we published this blog post. The Bank of England announced it was raising UK interest rates from 0.5% to 0.75% in response to their concerns that inflation could reach 10%. The hike was influenced by Russia’s invasion of Ukraine, which forced them to rethink their forecast for this year’s peak and now expect it to be several percentage points higher than previously thought at 7.25%. This is the first time the Bank has raised rates at three successive meetings in more than two decades.

The Ukraine war has speeded up already rising fuel prices, and if investments are left in accounts without sufficient rates, they will lose their value quickly at this inflation rate.

Safe haven gold bullion

As a precious metal, gold has historically been a reasonable hedge against inflation over the long term, rising as the cost of goods rise and maintaining purchasing power where currency under the mattress has been eroded by the increasing price of goods.

That said, over the shorter term gold bullion prices fluctuate in response to many economic and political stimuli within the global economy, including inflation, and the correlation is not perfect. Still, maintaining safe-haven bullion gold in a portfolio of strategic inflation hedges is a prudent move, allowing diversification and safe-haven advantages.

Strong spot gold prices

Gold has a long and venerable history of retaining or increasing its value during times of instability or uncertainty. This precious metal is called a safe-haven asset for good reason, and it is recommended as part of an investment portfolio because it often rises when other assets like stock are falling.

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The war in Ukraine has meant a flight to safe-haven assets, pushing gold prices up 18% from the beginning of February to early March. Other Precious metals have also seen significant gains. For example, the value of physical Silver, rose over 20% in a similar period.

Physical gold assets sit outside the banking system, reducing counterparty risk, and under certain circumstances, there may be tax advantages to owning the safe-haven yellow metal. Certain forms of gold are capital gains tax-free (coins minted by the Royal Mint) and investment-grade gold is also VAT free.

Ukraine crisis drives flight to safe haven gold 

The impact of the Ukraine crisis is both immediate and long-term. Stocks are volatile, living costs are rising, savings are being eroded and inflation is rampant. Against this backdrop, it would be prudent to hold gold within a balanced portfolio and let Gold’s safe-haven properties shine. 

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