World War 3 on the way? (Pt. 1)
Capital markets, as predicted, have responded to the ongoing Russian invasion of Ukrainian soil. How does this affect UK stocks in particular?
Is World War 3 on the way??? Should I be nervous and fear for my life. I mean I do live next door to the Royal Navy in Portsmouth and IF Russia was to attack the UK, 9 times out of 10, they will attack the Royal Navy and I will definitely catch some strays from the attack.
Personally I do not know if WW3 is at our doorstep, I am not a war expert and even war experts do not know if an actual WW3 will surface. What I do know is political instability has an effect on the economy, thus affecting the stock market. I wondered how does Russia invading Ukraine cause the global stock markets to plummet. I decided to do some research and this is what I discovered.
People who have an understanding of economics may have come across the term, “domino effect.” The domino effect means that an initial action on an initial subject may affect the next subject and this may cause the next subject to be affected and this continues until the subject at the end of the chain is affected (at times it operates in a cycle rather than a straight line).
As the first domino falls, the domino behind it falls and this chain of dominoes falling continues till the very end. This is why it is called the '“domino effect”.
Let me give you a practical example that economists and investors look into. The price of oil per barrel. Oil has many uses but let me use fuel.
Fuel is made from oil and this will affect two segments of the society. The first segment is businesses and the second segment is the ordinary citizen (you and I). If the price of oil accumulates, fuel-providing companies such as BP will face increased costs of manufacturing the fuel as oil is the raw material. Typically, BP will transfer these costs to their customers. Now the customers are the two segments mentioned earlier. With businesses, the costs of transporting the goods from warehouses or wherever they collect them to your local retail stores will be once again more costly as fuel prices have increased. You buying your products in your local Tesco will be more expensive because Tesco has incurred more costs in transportation and as they would be looking to earn profits, they will charge a higher price on their products, affecting the ordinary citizen. Using the second segment, remember BP is incurring higher costs in making fuel, fuel prices will increase and thus the fuel you put in your personal car is more expensive. Now you as the ordinary citizen, you are faced with increased costs from both your local retailer and BP.
You see the domino effect in the above example? The initial increase in oil per barrel has increased both how much you spend at the fuel station and in Tesco. The succeeding post will provide insight in how stock markets are affected by Russia’s invasion into Ukraine, which uses the same principle of the domino effect. This post was designed to provide you with the fundamental understanding of the domino effect and how international conflicts may affect the UK society!
Kind regards,
Nqobani Ndebele