Shamubeel Eaqub looks back over decades of global conflict and shock, and discovers that while history doesn’t repeat, it sometimes rhymes.
Are we in unprecedented times? Not really. History doesn’t tend to repeat, but it rhymes. It’s “precedented” if we look at the past with curiosity and humility and consider our investment strategies in that light.
The lessons of history are less black and white, and more nuanced and confusing than one might assume. The world is currently dealing with trade wars, regular wars, naval blockades, and an oil shock. Despite all of this, share markets have powered to record highs.
But gold prices are high too, as are bond yields. Share markets are signalling good times; gold and bonds are signalling difficult times.
I believe the world is at a hinge moment, a regime shift where the current rules of thumb are fraying. If these rules are changing, the further past is a better guide than the recent past. So, I went looking.
Tracking history
When I look back over the last 80 years of global conflicts and shocks, today’s confusing market signals aren’t so unusual. What happens in the real economy – jobs, inflation and activity – and what happens in financial markets, have not always moved consistently.
Most global shocks had a measurable impact on either New Zealand financial markets or the real economy. Some didn’t. About one in five major global shocks bypassed New Zealand entirely. What jumped out is how different the outcomes were. Some had big impacts on bonds, others on shares. Some delivered roaring inflation, some cratering activity, others soaring unemployment. Often a combination.
The Great Depression, World War II, the 1971-74 rupture, the 1987-90 banking crisis and reforms, the GFC, Covid and the Russia-Ukraine war all hit both markets and the wider economy here. Those were the big shocks.
The Suez crisis in 1956, the Asian Financial Crisis (AFC) in 1997, and 9/11 hit share markets, but the real economy was mostly insulated. During the AFC, shares fell sharply, but the economy only saw a short, sharp slowdown, bouncing back within a year.
The second oil shock in 1979 and the US-China trade war from 2018 onwards hit our economy through inflation and unemployment. Financial markets, on the other hand, were largely fine. The Iraq war, the Eurozone crisis, and Brexit had little impact on New Zealand at all.
The Korean War is a good example of how counterintuitive this can get. The wool boom that came with this war lifted New Zealand commodity prices so violently that inflation hit 12 per cent, and our share market got hit harder than the US, in volatility terms, on the way up and the way back down.
When a shock did affect the economy, recovery periods were uneven. The typical recovery time for the economy was one-to-two years before New Zealand was opened up in the 1980s. Since then, recoveries from recessions have taken longer. Share markets tend to feel impacts later. Earnings are lagged, and recoveries from long shocks can take 7-10 years – something we haven’t had to witness in the last decade.
The pattern across the century is intriguing. The economy is sturdier than the share market. It feels the pain first, and recovers. Share markets take their hit second, but they can stay knocked down for longer. History may not repeat, but it may rhyme.
A confusing legacy
Confused? Me too. I had expected to find clearer patterns of economic and investment consequences from global events. There is no tidy formula for global shocks and their investor impacts. Nevertheless, two takeaways stand out.
First, New Zealand isn’t always in the firing line. Some global shocks bypass us. But avoiding them usually requires local policy responses to insulate us. Domestic policy can amplify or attenuate global shocks. Copious monetary and fiscal stimulus insulated New Zealand during the pandemic. Conversely, if the RBNZ raises interest rates in an oil shock, it can amplify the economic and investment pain. Time will tell, as we enter a new one.
The two cases where New Zealand share markets never fully recovered before the next shock arrived were the 1929-33 Great Depression and the 1987-90 banking crisis. Both events saw domestic policy disasters layered on top of a global shock. The damage was largely homemade.
Second, not all shocks affect markets and the real economy in the same way. Markets are not a mirror of the economy; they are a selection of businesses that may reflect different investment signals. Right now, big tech companies are roaring away, apparently unfazed by war and an oil shock.
Implications for investors
So, what does it mean for you and me?
A few insights stand out based on history.
First, think carefully about inflation exposure. Of the global shocks that did affect New Zealand, more than half saw inflation peak above 5 per cent. Several pushed into double digits, including World War I, the Korean War, the 1970s twin oil shocks, and the 1987-90 banking crisis. The current backdrop, with trade wars, oil disruption and fragmenting supply chains, looks more like those decades than the deflation-prone 2010s. Holding too much in conservative assets during high inflation can punish you twice – once on the principal, once on buying power. Shares can be a hedge. But of course, one needs to proceed with caution in any case.
Second, set a realistic investment horizon. Global shock impacts are measured in years, not days or weeks.
The short end might be one-to-two years. The long end is seven-to-nine years. No one can predict what kind of impact, if any, New Zealand will feel from current events. This means having realistic liquidity for the things you want to do within shorter time frames.
Third, watch for policy mistakes. Governments and central banks around the world are dealing with contrasting demands: inflation, national security, political fracturing – all amid an uncertain outlook. Policy choices will diverge across countries, and some will inevitably get it wrong. As our own history shows, global events matter, but local policy mistakes matter even more.
Fourth, watch for the channel mismatch. The biggest investor mistakes tend to come when the headline story doesn’t match the actual transmission. The Eurozone crisis terrified share markets here even though New Zealand’s real economy was barely touched. The same happened with Iraq and Brexit. Pricing geopolitics correctly means betting against the noise as often as betting on it.
The investor qualities that seem critical in these times are simple to name and hard to live by. Discipline, so you don’t sell at the trough. Balance-sheet resilience, so you aren’t a forced seller. That requires understanding your goals, your risk appetite, your investment horizon and your liquidity needs. These are hefty and fundamental decisions, but in this changing world, the lesson of history is to revisit the fundamentals.
The information provided and personal opinions expressed in this article are intended for general guidance only and not personalised to you. These materials do not take into account your particular financial situation or goals and are not financial advice or a recommendation.
