What Are the Best Investments During Wartime?

If you’ve ever wondered what the smart money’s next move will be, you’re not alone. Many investors have tried to follow big investors like hedge fund traders, pension funds and other finance pros into the markets. But chasing the smart money can be a lost cause, especially during times of uncertainty. 

One of the ways to place a bet on what the smart money is doing next is to examine how they invest historically throughout changing investment cycles. Considering the chain of events in the past year, with Russia’s invasion of Ukraine, we thought now would be a good time to consider how to preserve wealth during war. 

What Are Investment Cycles? 

While bull and bear markets are the most widely followed, there are other patterns that could help you invest too. Investment cycles are trends in investment activity that span a certain period of time and are generally tied to business cycles. The forces that could influence an investment cycle include the economy, market conditions and investors’ mood, for example. 

An investment cycle could persist for any length of time, from several months to years on end. In general, there are four stages to an investment cycle. These include: 

1. Expansion: The economy is growing and investors are bullish. Valuations on assets from stocks to real estate soar and demand is robust. 
2. Peak: This is the point in the investment cycle when asset prices reach their pinnacle. Demand starts to slow down. 
3. Contraction:  The economy begins to narrow, and investor confidence weakens. Asset prices decline and demand slows further. 
4. Trough: The bottom of the investment cycle. Asset prices tumble to their lowest and demand is at its worst. 

War and Investing: An Historical Perspective  

In his book entitled “Wealth, War and Wisdom,” the late and great investor Barton Biggs explores preserving wealth when “the four horsemen are on the loose.” Biggs, a former money manager at Morgan Stanley, is talking about pestilence, war, famine and death. He discusses how to protect wealth through uncertain times. 

According to Biggs, to be worthy of anyone’s investment, whether it’s a family office or institutional firm, an asset class or product should be able to protect wealth during good times and bad. What point is there to accumulating wealth if it’s going to disappear during times of war? The wealthier you become, the more you’re going to have to protect that wealth. 

The 20th century was riddled with hard times, including two World Wars and the Great Depression. While hindsight is 20/20, Biggs points out that during the “fog of war,” it’s hard to tell just when the investment tide has turned. He says the equity markets knew when the worst was over, even before the expert commentators did. 

• Great Britain’s market bottomed in the summer of 1940 leading up to the Battle of Britain
• The tide on the U.S. market turned in May 1942 near the Battle of Midway
• Germany’s market peaked slightly before December 1941, when Germany declared war on the U.S. on the heels of Japan’s attack on Pearl Harbor. 

In each of these instances, only the markets — not the experts — managed to recognize these “momentum changes” in WWII. That’s why, he says, it’s important to “[listen] to what the market is saying by its action.” 

Markets and War 

Biggs in his book says that the markets hold great wisdom, especially when the tide is turning, something investors should ignore only at their own peril. He admits at the time that the next Apocalypse is likely to be different from the one he was focused on.

WWII proved that real assets like gold and jewelry can protect wealth. However, Biggs in a prescient warning urged investors not to keep these assets in safe-deposit boxes. He cautioned centralized banks could buckle under pressure and hand over the keys to these investments to others. 

These assets, he continues, are also vulnerable to being destroyed by fire or theft. For example, Poland at the end of WWII reported over 13,000 cases of missing art. 

“If the barbarians come next time as a terrorist attack or a plague, you are going to want to have your mad money close at hand.” - Barton Biggs, 2008 

Commodities and the Threat of Nuclear War 

Since Russia President Vladimir Putin invaded Ukraine, he’s brought the world to the brink of  nuclear war. With no sign of a peace agreement in sight, it’s difficult to pinpoint the precise phase of the investment cycle. However, one common theme that can be found among smart money is commodities. Ukraine, for example, is a key producer of commodities like wheat and cooking oil, to name a couple while Russia is a major producer of nickel, natural gas and oil. 

As long as the war persists, big investors like hedge funds are anticipating continued volatility in the commodities asset class, which they are more than happy to trade on. It’s being fueled by disruptions in the supply chain and trade flows. 

Hedge fund managers are preferring to trade commodities rather than get involved in Russian debt or stocks, where the risks are too high even for them. Bullish bets on commodities have paid off big, with the best funds earning profits in the hundreds of millions of dollars range, shortly after the war in Ukraine began.  

Historically, the gold price has gained during times of war. Investors flock to the precious metal throughout conflicts such as the Iran/Iraq war in the late 1970s, the Gulf war in the early 1990s and the events on 9/11, as the below illustration shows. 

However, the Russia/Ukraine war has been different. After climbing to above $2,000 per ounce and almost setting a fresh record after Russia invaded Ukraine in February 2022, the gold price faltered. By September 2022, gold lost one-fifth of its value amid rising interest rates and a strong U.S. dollar. Gold is off to a volatile start in 2023, shaving 6% off its value in the month of February alone. 

Conclusion 

The horrible war in Ukraine has thrown the markets into a tailspin. Rising interest rates and stubborn inflation have ensured that all bets are off across asset classes. Investors don’t have too many places to hide. However, long-term investors have history on their side, as the investment cycle tide has proven to turn at some point. When that occurs is anybody’s guess, in this case even the smart money.