Why investors shouldn't fear rising geopolitical tensions
Historical data suggests investors should fear major geopolitical events ... unless it tips the economy into a recession.
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KEY POINTS
- Since 1992, the ASX 200 has typically shown negative returns over one-month, three-month, and six-month periods following significant geopolitical and historical events
- The negative returns flip positive at the twelve month mark
Investors are bracing for a stock market correction after weakness from last week's hotter-than-expected US inflation was further compounded by an escalation in the Middle East.
Iran launched more than 300 drones and missiles at Israel on Sunday. The retaliatory attack had been widely expected after a suspected Israeli strike on its consulate in Syria. This marks the first-ever direct attack by Iran on Israeli territory from Iranian soil, sparking concerns of a wider regional war.
The headlines triggered a sharp selloff in a host of risk barometers like cryptocurrencies over the weekend, with Bitcoin down as much as 8.7% on Saturday.
Geopolitical events often see investors take chips off the table, as well as a flight to safety in treasuries, gold and quality. However, if historical data is anything to go by – it also serves as a compelling opportunity for medium-to-long-term investors.
ASX 200 performance after geopolitical events
Here's a list of some of the major geopolitical and historic events and how the market performed one, three, six and twelve months later.
Event | Date | 1 Month | 3 Months | 6 Months | 12 Months |
|---|---|---|---|---|---|
First World Trade Centre Bombing | 26/02/1993 | 4.1% | 8.2% | 18.3% | 28.3% |
Asian Financial Crisis | 8/10/1997 | -8.9% | -2.6% | 1.3% | -10.9% |
USS Cole Yemen Bombing | 12/10/2000 | 2.0% | 0.4% | 0.1% | -0.1% |
September 11 Attacks | 11/09/2001 | -1.3% | 3.7% | 7.2% | -2.9% |
Iraq War | 20/03/2003 | 4.0% | 7.8% | 11.5% | 19.9% |
Madrid Bombing | 11/03/2004 | 0.7% | 1.5% | 5.2% | 23.1% |
London Subway Bombing | 5/07/2005 | 1.7% | 7.9% | 11.0% | 18.5% |
Bear Stearns Collapses | 14/03/2008 | 3.7% | 2.3% | -5.8% | -35.8% |
Lehman Brothers Collapses | 15/09/2008 | -10.7% | -25.5% | -30.5% | -5.8% |
Boston Marathon Bombing | 20/02/2014 | -1.2% | 0.2% | 3.9% | 8.7% |
Russia Annexed Crimea | 24/06/2016 | 8.3% | 5.1% | 9.8% | 11.8% |
Brexit | 7/04/2017 | -0.4% | -1.8% | -3.6% | -1.3% |
Bombing of Syria | 28/07/2017 | -0.6% | 3.7% | 6.2% | 10.5% |
North Korean Missile Crisis | 28/07/2017 | -0.6% | 3.7% | 6.2% | 10.5% |
Saudi Aramco Drone Strike | 14/09/2019 | -0.5% | 1.0% | -20.5% | -11.5% |
Iranian General Killed in Airstrike | 3/01/2020 | 3.2% | -23.5% | -11.9% | -0.8% |
US Pulls out of Afghanistan | 30/08/2021 | -4.1% | -3.5% | -6.1% | -6.7% |
Russian Invasion of Ukraine | 24/02/2022 | 1.7% | -0.8% | -3.4% | 1.5% |
Israel-Hamas War | 7/10/2023 | -0.9% | 6.8% | ? | ? |
Note: The data reflects index returns and not total returns.
What does the data tell us?
Extended drawdowns often occur when the event drags the economy into a recession – namely the Asian Financial Crisis and Global Financial Crisis.
There have also been several instances where a major geopolitical event is coupled with another market-destabilising event. For example, Russia's invasion of Ukraine coincided with a global rate hike cycle, the Saudi Drone Strike in 2019 coincided with the US-China trade war, and the US-Afghanistan drawdown in 2021 was in parallel with China's Evergrande Crisis.
But as long as the economy avoids a recession, things tend to do pretty well over the medium term.
1 Month | 3 Month | 6 Month | 12 Months | |
|---|---|---|---|---|
Average | 0.01% | -0.28% | -0.07% | 3.17% |
Median | -0.40% | 1.50% | 2.61% | 0.70% |
% Higher | 47.4% | 68.4% | 61.1% | 50% |
The US version
This data set was inspired by Ryan Detrick from Carson Group. He created a similar data set that compares S&P 500 performance after geopolitical and major historical events dating back to 1940.
Interestingly, the US market tends to perform much better over three, six and twelve month periods.
1 Month | 3 Month | 6 Month | 12 Months | |
|---|---|---|---|---|
Average | -1.2% | 0.1% | 2.0% | 2.1% |
Median | -0.9% | 2.5% | 4.0% | 7.4% |
% Higher | 43.6% | 64.1% | 57.9% | 63.2% |
