BoAML: Stocks likely to "rally hard" if war commences

 
Peter Spence
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Pro-Russian militia in Donetsk, Ukraine (Source: Getty)

The chance of war this May is a signal to buy stocks, according to Bank of America Merrill Lynch.

Stocks have historically declined in the run-up to war, but then "rally hard once war commences".

Michael Hartnett, chief investment strategist at BoAML, points to World War II stock movements to make his point.

The chart below is a "classic example", says Hartnett, as German stocks dropped during the years before the invasion of Poland, and then soared upon Britain's declaration of war.

So while stock markets have been negatively impacted by the tensions over the Russia-Ukraine situation so far, now may be an opportune moment to invest.

Analysts at BoAML highlight an academic paper on what looks to be a paradox. The authors find that the puzzle "cannot be explained by risk or ambiguity aversion, or by expectations about a quick end of the war".

They note that the pattern has long been understood. "Buy on the sound of the cannon, sell on the sound of the trumpet" is a proverb as old as the Napoleonic wars, and attributed to 19th century London financier Nathan Rothschild.

"Investors tend to overreact to the bad news of a coming war, leading to underpricing, and that they similarly overreact to the good news of the end of a war, leading to overpricing," say the authors.

Thankfully, BoAML economist Vladimir Osakovskiy continues to see Russia refraining from open military intervention.