War and Share Markets
We recently heard the news of the airstrikes conducted by the Indian Air Force on the terrorist camps in Pakistan occupied Kashmir. A very welcome step, it definitely sends a powerful message to people who resort to terrorism and violence to meet their political agenda.
With arrival of the news our stock market went into a free fall. The Sensex fell down almost 500 points, indicating the fear of war faced by investors. A similar reaction was seen when our Army had announced surgical strikes in the noon of 2016.
So what is it that makes stock markets so jittery that shares fall so much whenever we hear the word war? The reason is “uncertainty”. Investors hate uncertainty. A war like situation will cause a situation where the returns from their investments may go down drastically. The theory behind the scare is that a war will disturb the daily activities of all the people in the war zone. This causes products and services of daily use to be cut down or stop being used at all. So the products from everyday use be it milk, vehicles, fuel, eating out everything halts. This stops the flow of cash from business to business and will result in slowing if the economy. And slow business growth will cause investors to stay away from equity as an asset class.
But if you see in long term the stock markets have always almost reacted better after the war has got over. In the medium term, what people do not realise is that war time is unusually the best time for businesses. In war times, the governments do not care about expenses and give a free hand to businesses to price their products. It is also the war times when businesses get contracts to supply materials to forces in the fight.
History has shown that all big companies which have used wars to their benefit and grow into big conglomerates they are today. Nestle, which started out as a milk company which wanted to provide nutrition to drought hit Ireland, made most of its revenue in the Second World War, when it provided dry rations to European armies. Royal Enfield and Harley Davidson, which are one the biggest brands today, became this big due to contracts they received from American and British armies for their transportation solutions. Jeep, also made most of its money by supplying general purpose four wheelers to American army in the gulf wars. There are many examples, Indian ones being, Maruti, Tata, Ashok Leyland, which have grown on military contracts only.
Another very good thing war gives us is technology. Since ancient history war has always given us technology which has prospered mankind. The science used to make the first swords gave birth to metallurgy. Technology used to make the first gun was later used to make railway engines. Missiles were previously made to attack nations were later improvised to make space exploration rockets. Internet which was supposed to be a military communication medium turned out to be a life changing invention for civilian purposes as well. There are so many examples of this.
War has always existed and always will. And stock markets have been volatile and always will be. We should never be afraid of volatility. An intelligent investor makes use of the greed and fear of people who lets emotions take the best of them.