Some wars are predictable. There are conflicts past and present which have been more or less expected because of economic and social conditions, a country’s history or that of its neighbours.
In today’s geopolitical landscape, one warning sign that really stands out is the buying and selling of weapons. There is good evidence that a surge in arms imports tends to increase the risk and intensity of future wars.
Building up military power does not merely prepare a country for war. It can also fuel the geopolitical tensions that make war more likely.
And there are economic effects too.
Our research shows that when a country starts buying more weapons, its stock market tends to fall. We found that increases in a country’s arms imports are associated with statistically and economically significant declines in its financial markets.
Weapons procurement also serves as a strong predictor of market movements – stronger even than the actual outbreak of a military conflict. This may be because markets are driven by surprises. And by the time a war begins, investors may already have expected it and priced it in.
Perhaps surprisingly, a large amount of information on international arms deals is openly monitored and recorded by organisations such as the UN and the Stockholm International Peace Research Institute.
Using the data they provide, investors can make gradual and proactive portfolio adjustments rather than waiting for the shock of war to send markets tumbling.
And we used the same information to examine the weapons imports and stock markets of over 72 countries (including the US, the UK, China and India) over a period of more than 50 years, from 1970 to 2023.
The conflicts we looked at included the 1982 Falklands War between the UK and Argentina, clashes between India and Pakistan in the 1990s, the invasion of Iraq and the ongoing war in Ukraine. We also accounted for a wide range of factors that could influence stock markets, including the broader economic environment.
Our evidence points to a definitive link between a country’s military build-up and the fortunes of its financial markets.
Economic power
The negative effect of arms imports on stock market valuations is not the same everywhere though. Less harm is done, for example, in autocratic countries.
This is probably because autocratic leaders are expected to fight for regime survival and to guard against the risks of a coup. As a result, any military build-up may be viewed by investors as an expected policy response in autocratic regimes.
Buying weapons is linked to a stronger negative response in stock returns in countries with a robust rule of law – like the UK or Germany – where government arms procurement tends to be more transparent and subject to greater oversight.
The relationship between acquiring weapons and a hit to the stock market is also stronger in non-Nato countries. This makes sense when you consider that Nato is a defensive alliance, so military spending among its members may raise fewer concerns.
So buying weapons carries costs that go well beyond the price paid for tanks and missiles, with a detrimental effect on a whole national economy.
This can affect the wealth of people who invest directly in stock markets or indirectly through mutual funds. Pensioners may also be exposed, since pension funds commonly invest in the stock market, meaning that decisions made in government procurement offices can ultimately affect people’s savings and retirement.
War economy
When weapons end up being used, apart from the devastating human cost, armed conflict can leave economies struggling for years after the fighting begins. One study estimates that ten years after a conflict starts, the GDP in countries involved in war is, on average, 28% lower than it would have been.
Trade links become significantly disrupted and sometimes severed altogether. Global supply chains that took decades to build can disintegrate overnight. Foreign investment dries up amid all of the uncertainty war brings.
The economic shock can reach far beyond the countries at war. As the invasion of Ukraine in 2022 and the war in Iran have shown, conflict can send energy prices soaring, adding to inflation and widespread economic pain. Buying weapons and using them is an expensive process from start to finish.
Ayman Omar is a member of the Global Association of Risk Professionals (GARP). Ayman confirms that he has not received any funding from GARP in connection to this or any other work (in the past or ongoing), nor was the research commissioned by GARP.
Cristiana Bernardi and Tomasz Piotr Wisniewski do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.