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Paris, Brussels: impact on the financial markets

25 March 2016,

Written by Charles de Saligny

On Tuesday 22nd March 2016, Belgium was struck by a number of suicide bomb attacks, with responsibility claimed by the self-proclaimed Islamic State. A number of months earlier, Paris had been the target. But, beyond the human and emotional drama involved, what will the short and long-term impact be on the financial markets?

It may appear politically incorrect to say so, but the financial markets are affected directly or indirectly by these attacks. On 11th September 2001, the world came to a halt, as did the markets. These attacks hit at the heart of the financial industry, New York. Given the seriousness of the disaster, Wall Street remained closed for a number of days. It was an extraordinary event that required extraordinary measures. Across the Atlantic, in France, the CAC 40 lost more than 7% in intraday value, as did the AEX in Amsterdam, while the Bel 20 fell by 5.5%.

Over time, though, the financial markets have learnt to live with this type of event, managing to retain a certain degree of sang-froid. On 11th March 2004, Madrid was hit and the Ibex fell by 3.13%. On 7th July 2005, it was London’s turn. Markets in Europe dropped 1.5% on average. If we skip Ukraine and fast-forward to Paris in 2015, with the attack on the satirical magazine Charlie Hebdo (and the manhunt through Paris), the CAC 40 finished in the black... And even with the major attacks on 13th November 2015, the CAC only fell by 0.16%.

When the attacks in Brussels happened, the Bel 20 lost 1.3% in the morning before recovering and ending slightly up on the day. The observation may be simplistic, but one conclusion that can be drawn is that the markets have become virtually impervious to terrorist attacks (albeit relative to the severity of the attack) and tend to take a more long-term view.

In actual fact, although the district where the European institutions are located was badly affected by the violence, the markets were barely hit by any pessimism, with the Eurostoxx 50 index losing only a few points.

In contrast, the attacks at the airport have caused a certain degree of mistrust, prompting investors to divest their securities linked to tourism and airlines. Air France, Lufthansa, EasyJet and others dropped 5% at the opening before recovering during the course of the day. It was the same scenario for Eurotunnel (with Eurostar halted) and Thomas Cook. But closing the airport has had a direct impact on the airport manager, as well as on the local carrier, Brussels Airlines (€5 million a day in loss of earnings), taxis, hire cars, etc.  On the other hand, shares linked to security, such as Securitas (+3%), have benefited slightly from the uncertain climate. There was nothing in particular to report in terms of movements in foreign currency. The tendency of safe havens, such as gold or sovereign rates (Germany, for example), was for gains in the hours immediately after the attacks, before ending the day without any real trend.

Taking a more macroeconomic view (one that we favour), as much as these kinds of attacks are now occurring too frequently and do not affect all sectors of the economy, there is no reason for a knee-jerk reaction and sell positions. As a reminder, a country’s growth is generated by a number of different factors: personal consumption (maintaining household confidence remains a priority), business investments (area at risk = withdrawal of investments) and public spending (infrastructure and elsewhere).

Provided the leading indicators do not suffer too much over time, there is no reason to be alarmed. Naturally there are some areas that are affected in the short term (airport, retail, etc.) and here we are only talking about events that are relatively rare in stable countries, with companies diversified geographically. Things would be very different in high-risk areas, such as the Middle East or elsewhere. However, we should not forget the geopolitical aspect. Europe is already feeling more than a little tension with the migrant crisis, with Schengen that has never been under so much pressure, the United Kingdom that is threatening to leave the EU (Brexit), and the agreement with Turkey. All this leaves questions unanswered.

There are always exceptions to the rule. We always keep a very close eye on this type of event, looking for any long-term impact on macroeconomics and microeconomics. But we do not respond by selling, emotionally and instinctively, pushed by fears created by this type of event. When it comes to investment decisions, it always pays to remain calm and rational, relying on your own tried-and-tested principles. Also, having a good spread in terms of geographic location and sectors helps reduce the risk.



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