Terrorism Is Tragic But Markets Are Resilient

Last month, 13 people were killed and more than 100 injured as terrorists struck in Barcelona and Cambrils, Spain. Terrorists also struck in Turku, Finland, in a stabbing attack claiming two lives and injuring several more. In the grand scheme of things, the loss of life overshadows anything investment-related. Now is the time for the living to pay respects to the deceased, count their blessings and remain vigilant against future attacks. For investors, though, remember that terrorism’s historical impact on capital markets is small—terrorists are unlikely to deter markets for long.

We are sure you are as tired of reading these types of articles as we are of writing them. Unfortunately, the list of recent terrorist-related incidents runs long.

• 2016 ended with a truck killing a dozen people at a German Christmas market.
• The new year started with a horrendous attack at a Turkish nightclub.
• The UK suffered three attacks before the first week of June ended.
• France has been hit by numerous acts of terrorist violence over the past couple years—this year, there was a knife attack at the Louvre and a shooting before the presidential election.
• In August a neo-Nazi domestic terrorist sped into a crowd of people, killing one and injuring many others in Charlottesville, Virginia.
• Thirty-seven people died in a casino attack in the Philippines in June.
• Not to mention scores of violent attacks in more volatile regions like the Middle East.

That is a long—and sad—list to type. But markets haven’t reacted with material negativity. Yes, equities fell coincident with the news of the Spanish attacks—a sentiment-driven short-term reaction. Taking a longer view and stripping out currency fluctuations shows global equities have bucked the serial violence.

Consider how UK equities have fared despite several attacks on its soil. (Exhibit 1)

Exhibit 1: UK Equities Carry On

Source: FactSet, as of 5/9/2017. MSCI UK Total Return Index with gross dividends in GBP, from 30/12/2016 – 5/9/2017.

The value of investments and the income from them will fluctuate with world stock markets and international currency exchange rates.

Taking a longer view, French equities also show little influence from terror. (Exhibit 2)

Exhibit 2: French Equities Too

Source: FactSet, as of 5/9/2017. MSCI France with gross dividends in EUR, 31/12/2014 – 5/9/2017.

The value of investments and the income from them will fluctuate with world stock markets and international currency exchange rates.

The unfortunate reality is terrorism is a part of modern life. This isn’t breaking news—attacks on innocent civilians didn’t just start happening in the past couple years. But terrorists seem to be increasingly employing small scale attacks, particularly those using innocuous, everyday items as deadly weapons. Practically speaking, we just don’t think there is a lot authorities can do to prevent one or a few radicalised individuals from taking a vehicle and driving it into a crowd of people. We realise this is both depressing and scary, but it’s the reality of the world we live in now.

Markets are aware too. This latest episode is unlikely to deter investors for long. Terrorist attacks don’t fundamentally alter economic and political drivers. Whilst they can hit sentiment in the short term, the surprise power is waning, given the frequency. As a result, terrorism lacks the power, punch and scale to meaningfully derail (currently positive) market drivers.

The world isn’t a perfect place—never has been, and whilst we are hopeful, it probably never will be. As an investor, you can’t wait for the pristine point when all fear is vanquished to invest. It’s scary, but equities are resilient—just like people. So offer a prayer or well-wish to those afflicted by recent violence and trust that free people will continue meeting—and overcoming—challenges presented by those who wish them harm.

ⁱ Source: FactSet, as of 5/9/2017. MSCI UK returns with gross dividends in GBP. 30/12/2016 – 5/9/2017.