What World War III would mean for investing

Could financial markets once again be underpricing the risk of a global conflict? In the nightmare scenario, the descent into a third world war began two years ago, as Russian troops massed on the Ukrainian border.

Today Israel’s battle against Hamas has the frightening potential to spill across its borders. American military support is crucial to both Ukraine and Israel, and in Iraq and Syria the superpower’s bases have come under fire, probably from proxies of Iran.

Should China decide it is time to take advantage of a distracted superpower and invade Taiwan, America could all too easily end up being drawn into three wars at once. The rest of the world risks those wars interlocking and turning into something even more devastating.

This scenario would of course place financial damage a long way down the list of horrors. Even so, it is part of an investor’s job to consider exactly what it would mean for their portfolio.

So far the possibility of a world war has barely caused a tremor in the markets. True, they have for some time now been more seized by fear than greed. Bond prices have been turbulent, even for supposedly “risk-free” American Treasuries, and yields have been climbing for most of this year. Stock indices in America, China and Europe have fallen for three consecutive months.

Yet this choppiness can all be plausibly explained by peacetime factors, including outsized government borrowing, interest-rate expectations and shareholders whose previous optimism had got the better of them.

In short, it does not look anything like the panic you might expect if the odds of the world plunging into war were edging higher. The brightest conclusion is that such odds really are close to zero. A darker one is that, like the investors of 1914, today’s may soon be blindsided. History points to a third possibility: that even if investors expect a major war, there is little they can do to reliably profit from it.