It's hard to find a more cynical place than the financial markets. Every time there is a catastrophe somewhere in the world, investors rush to look for opportunities to make money.
This was the case after the 9/11 attacks in the United States, the Fukushima catastrophe, the Arab Spring, and, of course, the wars between Ukraine and Russia, as well as between Israel and Hamas.
The beneficiaries varied in each case. For example, when hurricane season hits the United States, analysts often point to companies such as The Home Depot, Walmart, or generator supplier Generac.
Should we judge investors and analysts by their lack of empathy?
The famous saying is, “Judge not, lest ye be judged.”
Markets exist to react to all sorts of events, so it’s hard to fault investors for doing what they’re there to do. Instead, let’s join the majority and discuss who will gain from the worsening geopolitical situation.
Naturally, the defense sector is at the forefront of our minds.
When tensions rise, so do arms orders. It's no wonder companies like RTX Corporation, Lockheed Martin, and Northrop Grumman have outperformed the S&P 500 over the past two years.
However, they are not the only ones benefiting from global instability. The cybersecurity sector is also a major player, as modern conflicts are increasingly played out in the digital realm.
If we broaden the view, increased demand for weapons could also benefit metal suppliers and even chip manufacturers for military equipment. Overall, there are many opportunities.
However, there are better strategies than buying stocks just because a company belongs to the right sector. Approaching it with due diligence is essential so you don't waste money.
For example, research whether the company has had public contracts in the past, how large they were, and whether it can expand production if it gets a larger order.
If the answers to these questions are encouraging, you are on the right track. The next step is to assess the company's attractiveness based on the valuation parameters.
If you're still unsure about stocks, there's always a tried-and-true option – invest in safe assets that tend to increase in value during times of instability. We're primarily talking about precious metals – silver and gold prices often perform well during geopolitical crises.
What else should investors keep in mind?
In addition to monitoring announcements about possible new military spending, it is crucial to monitor the general economic situation, as unexpected developments can affect investments.
For example, this Monday, Rheinmetall shares fell on news that the German government had decided to cut financial aid to Ukraine due to budgetary constraints. Overall, it’s wise to remain cautious.
