UBS: Does terrorism pose a threat to markets?

Acts of violence have the potential to harm economies in several ways: consumers may delay or abandon purchases or trips; risk aversion can rise in financial markets; more populist politicians may gain power, limiting the free movement of people and goods and so reducing long-term growth.

Still, historical data suggests that terror incidents have only fleeting effects on consumer spending. For example, France’s INSEE consumer confidence index is down just 2.5 points since the Paris tragedy on 13 November. In comparison, the index lost 27 points in the wake of the US sub-prime crisis.

Market sentiment has also tended to recover quickly. It took the S&P 500 just one month to regain the ground lost after the 9/11 attacks, and UK stocks rebounded within days of the July 2005 London terrorist acts. While the effect on some sectors like airlines and hotels can be more acute, Europe’s leisure and transport sectors have actually outperformed the MSCI index by three percentage points on a total return basis since the Paris attacks.

The political effects of terrorism are harder to quantify. But we have seen some warning signs. Proponents of Brexit argue that the Brussels attacks show that Britain would be safer outside the EU. The odds of a British exit, as measured by bookmaker Paddy Power, did nudge higher from 33% to 36%. And the pound was also the worst-performing major currency on the day of the attacks, shedding about 1% against both the euro and the dollar. 

In the US, Donald Trump, who leads the race for the Republican presidential nomination, claims the events in Europe prove the need for immigration restrictions, which could reduce the supply of labor to the US economy. And in Europe, further attacks could weakenpublic support for the free movement of people within the EU, reducing labor mobility and hence economic efficiency.

An immigration clampdown would likely be a net negative. Migrants accounted for about half the increase in the workforce in the US over the past decade and roughly 70% of the rise in Europe, according to OECD data. Migrants, usually young, frequently fill important niches in fast-growing sectors and boost the working-age population.

Still, such political shifts, if any, would only materialize over a long period of time, and it is far too soon for investors to change their positioning. And while opponents of free trade and immigration have gained ground, the power in developed nations is still held by pro-globalization politicians. Institutional checks and balances also limit the ability of proponents of radical shifts to make changes. Meanwhile in the UK, the pro-EU campaign still leads in the polls.

The bottom line is that while terrorism is a human catastrophe, economies and financial markets in developed nations do not exhibit a high degree of sensitivity to such events. Barring a sharp spike in terror activity, we expect it to remain that way.

Author: Mark Haefele, UBS Global Chief Investment Officer

Wealth Management

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