Russia invades Ukraine – early thoughts on the implications for investors
Written by Kel Nwanuforo
Following weeks of speculation and military buildup, Russia’s Vladimir Putin has finally thrown all caution to the wind and mounted a full-scale invasion of neighbouring Ukraine. A sovereign European nation now faces the complete overthrow of its government. In the year 2022.
The situation will undoubtedly shape up to be a tragedy in human terms and is also a sharp and serious blow to the rules-based international order which we in the West hold dear.
Yet, hard-headed as it may seem, investors must cast a pragmatic eye on events and assess if they are likely to pose any long-term risk to capital.
And while nothing is ever certain in the world of the financial markets, at this early stage of developments it appears unlikely that this is the case. For one thing, the initial stock market response has been rather relaxed about the incursion.
Waking up to the news on Thursday morning, major global markets registered modest declines in the order of around 1.5% to 4% depending on nation. Yet on Friday, markets rallied and most of the preceding day’s declines were recouped.
While this situation is clearly far from over, this reaction is far from suggestive of market panic.
Taking a longer-term view, data shows that with past wars and invasions, markets have tended to prove volatile in the run-up to the first shots being fired – and then to pick up from there onwards.
Certainly that profile would fit this case too at this early stage, as markets have proved choppy from the start of the year up to now. Although of course there can never be any guarantee that history will always rhyme, these empirical observations do mesh with the oft-observed maxim that what markets really dislike is uncertainty – sometimes more so than negative events themselves.
In the short-term, the most significant impact of Russia’s adventurism is likely to be on energy prices. As a major global supplier of gas and oil, prices could rise and this could exacerbate existing concerns over the quickening pace of worldwide inflation.
However, inflation is an issue of which central banks are already only too aware and most are already planning action to tackle it. It is also worth noting that the impact on the inflation figures of moving from oil at around $90 to $100 – which is broadly what we saw on Thursday – are naturally less than moving from $20 to $85, as occurred between 2020 and 2021 due to the gyrations caused by the COVID pandemic.
Finally, with headlines full of sanctions, restrictions and other losses of privilege for the Russian economy, investors should keep in mind the following facts:
- the entire size of Russia’s economy is smaller than the combination of the Netherlands, Belgium and Luxembourg;
- the Russian stock market makes up a tiny proportion of the global total, less than 1% by value; and
- the direct exposure of most global companies to Russian revenues is limited.
At least pending further developments, at this stage we do not believe there is any need for investors to take immediate action on the back of the invasion.
Capital markets have come through even worse in the past: it is worth keeping in mind that modern stockmarkets predate both World Wars. We have no reason to doubt that they can continue to do so on this unhappy occasion too.