What the Paris attacks tell investors

Chinese Financial Association of HK December 05, 2015 08:02

The terror attacks in Paris, which killed 132 people and injured 350, have been attributed by many commentators to religious and cultural differences.

However, one must remember that there are 2.08 billion Muslims all over the world, representing 28 percent of the global population. Most of them prefer to live in a peaceful world.

In fact, we rarely hear Muslims in relatively rich nations like Saudi Arabia, Kuwait and Malaysia being involved in terrorist attacks.

On the other hand, some countries in the Middle East are mired in years of wars with countless people losing their family members and homes. These places become breeding grounds for terrorists.

Meanwhile, there are Muslims in the western world who have failed to enter the mainstream society because of their limited education, low income or joblessness. Terrorists are targeting this group of Muslims to recruit as new members.

The Paris carnage has far-reaching political and military impact. It could transform the political power structure in Europe, and political parties who are against migrants and propose stricter border controls and daily supervision of local residents might become more popular.

Meanwhile, the economic impact of the Paris attacks depends on how the event will affect key sectors and components of the economy, such as energy, transport, finance and public facilities.

For example, the September 11 attacks in the United States crippled the financial sector for nearly a whole month in 2001.

As a result, the US quarterly GDP contracted by 1.3 percent back then. By contrast, most terrorist attacks have very limited or temporary economic impact, as terrorists are forced to target less critical public areas.

The negative impact of the Paris attacks is similar to that of Madrid train bombings in 2004 and the suicide attacks in London in 2005.

Those two earlier catastrophes wrought huge damages to the local tourism and retail sectors, but the drag on overall GDP was less visible.

For example, Spain’s GDP growth was 3.2 percent in 2005, unchanged from the previous year. The the UK's economy grew 2.8 percent in 2005, up from 2.5 percent in 2004.

Similarly, the Paris attacks may exert a negative impact on France’s tourism and retail industries. The French government already announced more spending on national defense and security. The UK plans to recruit 1,900 intelligence and security staff. The European Central Bank is likely to ramp up its monetary easing.

The volatility index surged the day after the Paris killings. Global equities softened, while government bonds in the US and Europe rose.

Terrorist attacks may benefit US dollar, US treasuries and other safe-haven investments.

Meanwhile, the attacks have yet to change the energy supply and demand imbalance. The oil price was little affected. European market rebounded quickly.

However, if the attacks damaged key sectors like finance, energy and transport, they could have a much bigger impact on the economy and financial markets. The US stock market, for example, was closed for a week after the September 11 attacks, and the Dow Jones tumbled 7.1 percent when it resumed trading.

Certainly, terrorist attacks would increase demand for safe-haven assets, like the US dollar, US bonds and gold.

Geopolitical risks are closely tied to these incidents, and the US, Europe, Russia and China all intend to ramp up spending on national defense and big data analysis. That would benefit military and telecom stocks.

In order to prepare for such uncertainties, investors should keep certain defensive assets in their portfolios, such as government bonds and cash.

They should also adjust exposure to risky assets like equities in accordance with real economic damages.

This article, published in the Hong Kong Economic Journal on Dec. 2, was contributed by Pu Yonghao (浦永灝), founding partner and chief investment officer, Fountainhead Partners Co. Ltd.

Translation by Julie Zhu

[Chinese version中文版]

-- Contact us at [email protected]

JZ/DY/CG

Chinese Financial Association of HK

formerly called The Federation of Alumni Associations of Chinese Colleges and Universities in Hong Kong