Buy when there's blood in the streets?

Abraham George Market Musings

When Iraq invaded Kuwait in Aug 1990, I was working in Abu Dhabi as the Chief Dealer for Foreign Exchange at the Abu Dhabi Commercial Bank (ADCB). I remember coming to the office very early that day and the markets had gone berserk over the place.

I had a close friend working for a financial institution in Kuwait and I frantically called him to check on him. He was just getting ready to go to the office and had no idea Kuwait had been invaded. I warned him not to get out of his flat, and as we were talking he exclaimed that he sighted a few paratroopers on top of his building. The call terminated abruptly and the next I heard from him was only after one and a half years when he had joined Bank of America in Mumbai.

The Kuwait invasion and atrocities continued unabated by the Iraqi regime. Finally, it was on 16 Jan 1991 that the US launched Operation Desert Storm to liberate Kuwait from Iraq.

Whenever any major surprise event happens, it unleashes a market pandemonium. Volatility goes crazy and trading becomes very news-driven. While my focus was on the interbank FX markets, the bigger opportunities and volatilities lay in the equity markets actually.

When tension builds up around an escalating conflict, it creates market uncertainty. This tends to hurt the stock market. In the two weeks that led to Congress authorization, the S&P 500 tumbled more than 6%. However, the day after the Desert Storm i.e. 17 Jan 1991, the S&P 500 jumped up by 3.7%.

The one thing that markets categorically detest is uncertainty. The moment certainty starts to return, the animal spirits started to manifest in the markets too. It doesn’t matter if it is peacefully resolved or (counter) military action is declared.

We have seen this occur many times before. The same pattern was played out at the start of the hostage crisis in Iran in 1979 and immediately after the 9/11 attacks. Each time, the fear of war lead to equities falling.

During periods of looming uncertainty, investors move away from paper (financial) assets such as stocks. Once the threat subsides, investors return with a vengeance and the prior trend is resumes.

Let’s look at a more recent example. When Russia invaded Crimea in 2014, investors feared an outright war. The US markets fell by almost 8% between mid-January and mid-February in 2014. But by April 2014, the markets had recovered and even surpassed the previous highs.

Again we had another bout of tension in the region from Nov 25 to Dec 24 as US stocks fell by 13% in 2018. But once the dust got settled, the markets rebounded by 24%.

A very similar situation is unfolding now. We have no idea what the resolution regarding the situation in Ukraine will be. We don’t know what endgame strategy Putin has in mind. However, at some point, the financial risks to Russia will far outweigh the expected benefits. Prolonged sanctions (financial and trade) could prove much costlier than Putin anticipates.

Meanwhile, the markets will continue to remain very choppy and volatile and that is all because of the disconnect between the real economy and the financial economy. These lower levels are opportunities to add longs again. Baron Rothschild is said to have advised that the best time to buy is when there is “blood in the streets”. While Baron Rothschild's quote is a bit visceral, it's right on the money for investors who turn bullish in times of maximum pessimism.

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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund. Currently, he is a co-founder of a new hedge fund where foreign citizens can invest in Indian growth stocks like Tanla operating in hyper-growth markets like CPaaS.