Market commentary: How terrorism impacts stock markets

Stock markets are inherently good at reflecting the latest news through the pricing of assets, and news of terrorism is far from an exception as these acts create uncertainty and uncertainty leads to sharp movements in markets.

On September 10, 2001, the Dow Jones Industrial Average closed at 9,605.51. Following the aftermath of the September 11 terrorist attacks, the market reopened on September 17 at a low of 8,755.46, it would take the U.S markets over a month to recoup those losses.

Although this incident is one of the most extreme examples of what terrorist activity can do to markets as it hit the world’s financial centre, each attack is different but always leads to weakened market confidence, irrespective of the location and targets.

Following the tragic attacks in Paris, there were several sectors that felt the impact, however the most affected are usually those that are exposed to tourism. Prime examples would be Airlines and Travel shares due to the renewed uncertainty when or where the next attack would be. Due to this it is likely that many people that had planned a vacation for the coming months would either cancel or postpone, causing a large unexpected loss in revenue for such companies.

Evidence of this in Paris were shares of airline Air France and AccorHotels that both fell over 5% whilst Aeroports de Paris SA which runs Charles de Gaulle Airport in Paris fell close to 4%. Other European examples are holiday travel coordinator TUI AG that dropped more than 4% and Thomas Cook Group PLC dropped close to 5% following the attacks.

The market reaction was not only limited to European companies but also spread over to U.S names including Delta Air Lines and American Airlines Group Inc that both fell close to 3%

There are however a few investments that can be seen as safe havens following or in anticipation of terror attacks. One of the more popular safe havens is gold. Gold jumped the most in almost a month following the terror attacks because it is an investment that is expected to retain its value or even increase its value in times of market turbulence. Safe havens are sought after by investors to limit their exposure to losses in the event of market downturns and high levels of uncertainty.

Other examples of investments that increase in value following a terrorist attack are war stocks such as Shares of Lockheed Martin and Raytheon. These shares gained 4% after the attacks, fueling its second-biggest gain in three years, these companies make the weapons and vehicles used in the fight against the war on terror so defence stocks bounce in anticipation of higher demand.

While there is no perfect strategy for hedging against terrorism, there are stocks that are less likely to be hurt if the market is rocked by an attack. Having said this, the market reaction so far has been fairly content with U.S indices moving higher yesterday and European markets adding over 1.5% this morning.

This article was issued by Andrew Cassar Torregiani, Trader/Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.