Bonjour,
Following the terrorist events in Paris, I wanted to check the
literature and see what market impacts terror usually had.
Indeed, while the events unfolded, global stocks rose!
In 2005, Andrew Karolyi from the Fisher College of Business
wrote 13 pages on this subject: The Consequences of Terrorism for Financial
Markets: What Do We Know?
In this relatively old research piece, Karolyi focuses on 75
terror events, including the 11/09/2001.
I have also researched the Global Terrorism Index 2014
for extra data.
1)
Firms closely related to the terrorist
attacks exhibit the largest moves.
For instance, when an oil platform of Shell is targeted by
terrorists, the Shell share falls in price but not the shares of Coca-Cola.
In 2001, airline shares halved in the following month given
the new restrictions on air travel.
Some shares/sectors move the opposite way.
For instance, large terror attacks biff up shares in defence
or security companies.
Also, a if a company A in sector X has its facilities
destroyed, shares in companies B, C, D in the same sector X may rise as they
will gain market share.
2)
But durable share price losses are linked
to asset losses
If you are an oil company with one oil platform and this one
is targeted, your shares may never recover because your source of cash-flow
generation is impaired.
If a truck delivering Coke bottles is destroyed, the ability
of Coca-Cola to deliver profits will not change and its share price will not move.
Fairly logic if you want my opinion.
3)
The average market cap impact is $401m
This has to be taken in the context of our megacap strategy.
Our GTR portfolio average market cap is close to $150bn.
Here, we are talking about 0.25% impact to an average share!
Merely equivalent to normal stock prices daily volatility!
4)
Correlations increase for a short while
This means that global stock markets will move more and more
in the same direction for a short while before reverting to previous patterns.
In times of stress, correlations increase and terror attacks
are no different.
5)
Some countries have a diverse enough
economy to withstand the effect of terrorism
In Nigeria, Boko Haram has been abducting women for a few
years now, which has diminished the flow of FDIs.
But this has not prevented Nigeria to display high single
digit GDP growth rates as the figure below is showing.
It all depends on the scale of terror.
Nuclear terror would be the worst case scenario while some
localised smaller terror attacks affect the economy less.
6)
In the end, terrorism affect few lives
relative to other violent deaths
This graph says it all: 40 times more people were killed by
homicide than terrorism (2012 figures).
7)
My corollary: it is very difficult to
build a portfolio against terrorism
Building such a portfolio would require extraordinary level
of information to be able to predict where the next event would unfold.
Or, one may choose sectors which profit from terror: defence
companies, IT companies, security guards agencies.
The caveat is that these companies also depend on larger
trends which may have bigger impacts on their revenues than single terror
attacks.
Then, it will require to be a very active trader because
share prices tend to recover very quickly.
In 2005, during the London terror attacks, the FTSE 100
dropped initially by 3% before recovering completely by the end of the
following day.
Better not be on holiday without access to your trading
terminal!
Finally, as you build such a defensive portfolio, are
you not missing out on growth opportunities elsewhere?
Markets go up more than 75% of the time so why restrict
oneself to a narrow strategy?
Link to the study: http://fisher.osu.edu/supplements/10/9860/200606.pdf
If this subject interests you, the Global Terrorism index
for 2014 can be found here: http://www.visionofhumanity.org/sites/default/files/Global%20Terrorism%20Index%20Report%202014.pdf
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