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A worst case hypothetical scenario

Index tracking funds and ETFs
Plutus
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A worst case hypothetical scenario

#126811

Postby Plutus » March 21st, 2018, 6:00 pm

Good evening.

I’ve moved a proportion of my portfolio to Vanguard regional ETFs and I’ve been doing some very lateral thinking.

Hypothetically, if I have invested in a European ex-UK ETF what would happen if France and Germany had a fall out on WWI or WWII scales?

The companies that comprise the fund may not exist after a conflict but would the fund assets be held elsewhere (domiciled in Ireland?).

Would the stock markets in Europe be suspended and the fund wound up? Owners would receive their share of the value at that point?

It’s unlikely that this will happen but it could be a risk in less developed markets?

I’d be grateful if anyone could explain what happens in a worst case scenario.

Thanks.

Lootman
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Re: A worst case hypothetical scenario

#126824

Postby Lootman » March 21st, 2018, 6:37 pm

Here is a little trivia. I read somewhere that the only two stock markets that have continually traded over, say, the last 100 years are the US and the UK. Every other stock market has had at least some dislocation during which time you could not buy or sell.

Of course, the US markets were shut for much of the week of 9/11. But I am talking more about how wars disrupt markets.

Thinking about it, I'm not sure why the Swiss market would not have stayed open during WW1 and WW2.

There is a good deal of survivorship bias in market performances if you go back far enough.

More recently it has been the emerging markets that have had these issues. I can personally remember markets in Egypt and Malaysia being closed down because of event risk. UK-traded ITs and ETFs that invest there would still trade but go to huge discounts.

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Re: A worst case hypothetical scenario

#126826

Postby SalvorHardin » March 21st, 2018, 6:40 pm

There are no hard and fast rules for stockmarkets in a war zone, but the worst case has to be a complete loss. Based on what has happened in various countries in the past you can expect some or all of the following to happen:

1) Market collapse of -50% or more, possibly total wipeout in the losing country.
2) Suspension of trading for the duration of the war
3) Confiscation of companies by the state or the victors.
4) Partial or total destruction of companies (shares in a company whose assets have been destroyed won't be worth much, though their brands and other intellectual property may still have value)
5) Loss of audit trail to show ownership of assets (destruction of registrars offices)

Having shares in a fund located in a different country may not be much protection against any of this.

Had 9/11 involved a nuclear weapon sufficiently powerful enough to take out most of Manhattan the damage would have wiped out most of the American insurance industry. That's because many insurers back then stupidly didn't have nuclear exclusion clauses in their property damage policies (unlike European insurers)

The London Stock Exchange closed for quite a while during the First World War but remained open for most of the Second World War. I believe that the FT30 indexe's lowest ever point was at close on the eve of the Dunkirk evacuation.

https://en.m.wikipedia.org/wiki/London_Stock_Exchange

I recommend the book "Wealth, War and Wisdom" by Barton Biggs, which goes into great depth about investments and war throughout the ages (it's where I saw the reference to the FT30 on the eve of Dunkirk). I can't find my copy at the moment. The key thing to realise, and this book hammers the point home, is that war will probably devastate the value of investments in the country where the war is being fought.

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Re: A worst case hypothetical scenario

#126855

Postby Plutus » March 21st, 2018, 8:05 pm

Thank you for the replies. I did read an article by Biggs re: the German, U.K., USA and Japanese stock market high/low during WW2. I also read something about how 26 or so investment trusts survived two world wars.

Re: vanguard VERX the European etf, there is approx 20% weighting to the Swiss market and if there was a conventional conflict you’d expect their large pharmaceutical companies to profit from it.

I also twigged on the commute home that obviously the funds are buying the shares of the companies that make up the index; if those stocks are worthless then the etf could become worthless but it depends on the geographical weightings.

I recall that @inv35t has suggested as a safe diversifier to buy USA stocks, U.K. house and gold deposited at the Perth (Australia) mint.

I’m again over complicating things so I may as well plod on with my strategy, thanks again and I’ll chase up the reference that was kindly linked to above.

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Re: A worst case hypothetical scenario

#127395

Postby GeoffF100 » March 23rd, 2018, 8:13 am

It is not at all likely that France and Germany will go to war in the foreseeable future. France is nuclear power for a start, so the conflict would not last long. The EU has been very effective at stopping war in Europe.

The main threats to Europe are from outside. Russia is the obvious threat. There would have to be a lot more European integration before Europe could defend itself, and we may not always be able to rely on the US. Climate change is also a threat. Wars will inevitably be fought over the fertile land that remains.


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