THE rise of the Crimea conflict and territorial disputes in the South China Sea
suddenly raise the spectre that warfare may no longer be a thing of the past. After all,
politics is cultural mixing without violence and war is cultural mixing with violence.
The reason why we need to think seriously is that war will disrupt any plans for the
future of Asia and our investment strategies.
We have gone through the longest peace time enjoyed in recent history (1945-today),
longer than the four decades of peace between 1871-1914 and after the fall of
Napoleon (1815-54).
These long years of peace have blinded us to the risks of war, but investment
allocation strategy cannot ignore the reality that even the expectations of war
changes fundamental market behaviour. The old adage “buy with the cannons and
sell with the bells” suggest that we should buy when everyone is afraid, and sell
when everyone thinks prosperity is forever.
During my travels in France this month, I had the chance to read military historian
Prof Azar Gat’s monumental book, War in Human Civilization (Oxford University
Press, 2006). His survey on the anthropological, geographical, cultural and
sociological origins of war concluded that war and civilisation co-evolved in ever-
growing complexity. Gat has discerned that in the 20th century period of Anglo-Saxon
hegemony, there is a pattern away from war, because the British and American
empires tended to deal with competitors and rising powers through a sequence...
“from isolationism to appeasement, to containment and cold war, to limited war, and,
only most reluctantly, to full-fledged war.” The engagement phase works on the
assumption that with increased prosperity through free trade and investment,
prosperity and wealth would commit the rising powers to peace, because war would
create such losses that no one wins from armed conflict.
But Gat reminds us that throughout history, competition between different powers
often enter into arms races that eventually led to war. War was not intended, but
policy mistakes, misunderstandings and populist anger from nationalist, religious or
revenge motivations can trigger off such arms races. For example, one of the reasons
why the Pacific War occurred was because of the denial of oil and strategic
resources by the Allies to Japan.
The push for liberal democratic movement on a global scale arose from the
assumption that when everyone is rich, there will be a peace dividend. Unfortunately,
inequality from a whole host of reasons, including water, food and energy scarcity, is
rising which is stoking civil unrest, failed states and the rise of terrorism and illegal
migration. Conflict tensions also rise because of competition for resources and revival
of nationalist and religious fervour.
In the Crimea case, Russian nationalism arose from a mixture of national anger after
the collapse of the Soviet empire, where a large number of Russians were left behind
in Crimea and other neighbouring areas.
There is also an ideological difference in worldview. Under the common law
perspective of the West, the default governance model is the Montesquieu Trinity –
the balance of powers between the executive, the legislature and the judiciary. In the
East, using China as one historical model, the balance was between the trinity of the
civil and military bureaucracies and a censorate or inspectorate that checks that the
civil bureaucracy would not be too corrupt and that the military would not engage in
coups against the state.
Notice that the signal difference between the two models is that the Western model
assumes that the military is not a major factor in national governance. The fact that in
Egypt and Thailand, generals are back in charge suggests that this model is not
always valid.
The possibility of war changes completely the investment calculus. Gold prices
should have fallen with the prospect of higher interest rates. They are holding up
because during periods of uncertainty, gold has a certain risk premium.
The price of oil and gas will be key to future global tensions. About 16 per cent of
European energy needs flow through Ukraine, and half of Russian government
revenue depends on oil and gas production. High oil and gas prices will benefit
Russia and the oil producers, while hurting the oil importers. Since the United States
has become the world’s leading energy exporter with onstream production of shale
oil, geo-political reasons suggest that low energy prices may be used to reduce
conflict tensions.
The first is that low oil prices will be inflationary and this will be important for the
recovery of the United States, reduction of the real value of U.S. debt and helpful for
the recovery of Europe and Japan, which are both oil importers.
The other effect will be the reduction of the economic capacity of Russia and oil
producers in the Middle East to spend on the military. Drilling for expensive oil in
territorially sensitive waters will not be so economically viable.
Low energy prices have other side effects. One dilemma for investors is the ongoing
and possible write-downs for huge investments of listed oil and energy companies in
exploration for oil reserves, thinking that high price oil will be forever. In fact, recent
research suggest that if oil prices remain low, then a lot of reserves of the listed
companies found in deep water and high cost production areas will be in trouble. For
example, if the world were to agree to limiting carbon emissions to the current levels,
many of these reserves of the listed companies would not have high value. In other
words, oil and gas shares may suffer because these reserves are unlikely to be
tapped.
For these reasons, if risks of war and inflation were to increase, higher interest rates
will slow Asian economic growth, unless some governments decide to use military
expenditure to push up economic activity. Share prices in armament industries will
rise. That of course is exactly where the arms race led to world wars in the 20th
century.
With nuclear capacity spreading throughout the world, logic tells us that a 21st
century war will end up with no winners.
If we want to prevent war, start investing in peace.
Andrew Sheng is Distinguished Fellow of the Fung Global Institute.
A version of this article appeared in The Star, 7 June 2014
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