We hear the word "turning point" everywhere these days, and rightly so. A decades-long phase of relative peace in Europe came to an end with Russia's invasion of Ukraine. In Germany and other NATO states, a rearmament is beginning the likes of which we have not seen for a long time. Although there may not be a war on the horizon, a new cold war is likely, with NATO and the allied Asian states (Japan, Australia, New Zealand, South Korea) on one side and China and its impoverished vassal state Russia on the other.

What does this turning point mean for the capital markets? I would like to use three points to illustrate what investors are likely to face in the medium term:

Historically, wars have always been a driver of inflation. This is particularly evident in the UK. The United Kingdom is a good case study because it has not experienced a currency reform or hyperinflation since 1661, so the effects of wars on inflation can be determined relatively easily. And lo and behold, there have always been major spurts when it came to arms: the Seven Years' War, the Napoleonic Wars and the two world wars. The only exceptions are the oil crises of the 1970s, which also drove up the rate of inflation. War has an effect on inflation for two reasons. Firstly, countries have an increased demand for armaments and soldiers. Secondly, foreign trade shrinks drastically. This was the case during Napoleon's continental blockade of Great Britain and is now also the case with Russia, which has been cut off from foreign trade within a few days by sanctions.

Equity markets, on the other hand, suffer much less from wars than bond markets, for example. The USA is a good point of comparison here, as the market there has experienced neither a political system change nor a currency reform in the past 152 years. And there it is clear that wars were not responsible for the most dramatic slumps. Neither the First nor the Second World War had the impact that the end of the Roaring Twenties, the collapse of the Neuer Markt or the bursting of the real estate bubble did.  

The situation is different with bonds. Let's take a look at the period from 1900 to 1984, which includes two world wars as well as long phases in which interest rates were kept low to make it easier for countries to reduce their debt. It turns out that over these 84 years, bonds only recorded a gain of 0.13% per year - after deducting the inflation rate - while equities returned 4.5% per year. So not only did bond buyers profit less than shareholders during this period, they also financed the majority of the costs of the war through their bonds.

Accordingly, not much will change for investors. Inflation rates will remain high and interest rates will rise slightly, but not significantly. In Europe, we hardly expect more than two percent, in the USA hardly more than three percent. This means that many investors will still find their way out of "safe" investments such as bonds or savings accounts and into shares, company investments, gold and real estate, possibly more quickly than previously assumed.

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