War in Ukraine – How should investors respond in an uncertain climate?
This article is intended for Professional Advisers Only, for advice on your personal situation, please speak to a Financial Adviser.
The world continues to watch in horror at the growing humanitarian crisis caused by Russia’s invasion of Ukraine. The tragic loss of life, widespread destruction and mass displacement of people are the primary concerns; the long-term political, social and economic consequences are yet to be seen. Here we’ll look at some of the main implications of the conflict for financial markets and investors.
It will take time for the full economic and financial impact of the war in Ukraine to play out. At this relatively early stage, three weeks since Russia launched a full military invasion, we have seen increased volatility in financial markets but few signs of widespread market panic.
After declining in the lead up to – and the announcement of – Russia’s invasion of Ukraine, global stock markets have held up in the weeks since. European equities have underperformed during this period, which is unsurprising given the region’s proximity to the conflict and thus greater exposure to spillover effects.
Here are some of the key market themes that investors should be aware of:
Rising commodity prices: Russia is a major global supplier of oil and gas, so fears of disruption to output and exports drove global oil prices to highs last seen in 2008 at the start of March. Food price inflation is another important issue. Russia and Ukraine together account for around 30% of the world’s wheat exports, with prices rising sharply on concerns about supply shortages. The impact of this dynamic is expected to be uneven across countries and regions: commodity exporters stand to benefit from higher prices, while commodity importers will face risks from higher prices and food insecurity.
Higher inflation risks and pressure on central banks: Soaring fuel and food costs will feed into existing concerns over inflation, which was already running at multi-decade highs in the UK and US when the conflict in Ukraine began. In recent months, central banks have adopted a tighter policy stance to combat rising price pressures. Now they face an additional challenge as the war in Ukraine creates new risks to global economic growth. Again, the impact is likely to be even more profound in Eastern Europe and Central Asia due to close economic ties with both Russia and Ukraine.
Russia sanctions: The Russian economy has been hit with a combination of tough Western sanctions and corporate boycotts since its incursion into Ukraine. This has caused the value of the rouble to plummet while leaving the country increasingly isolated from global capital markets and at risk of debt default. Amid understandable concerns about contagion effects, it’s important to remember that Russia plays a relatively limited role in the modern global economy, oil and gas exports aside.
Fighting the urge to act as an investor
This is an emotional time for us all, and as an investor the urge to do something drastic when uncertainty rises is strong. This is a natural reaction, but in these challenging moments it’s important to remain pragmatic and level-headed when making investment decisions. Hard as it may be in an uncertain and volatile climate, investors should try to tune out the noise and maintain a long-term perspective when assessing their portfolios.
Historically, market corrections triggered by wars have been relatively short-lived. Recent calculations by Vanguard based on eight major geopolitical crises over the last 60 years showed that, following an initial sell-off, US benchmark equity indices returned an average of 9% one year on from the event.
No one can say for sure that the outcome will be similar this time, but the past shows that it is better not to overreact during periods of market volatility. We believe that sticking to the fundamentals of broad diversification and prudent risk management remains the best way to achieve long-term success as an investor.