Geopolitical tension mounts, amidst Ukrainian/Russian conflict. Should investors panic?
The past week’s events have made it crystal clear that Russia’s invasion of the Ukraine and the recognition of the Luhansk and Donetsk regions as independent states is a definitive assertion of Russia’s ambition to rebuild the vision of the former Soviet Union. This has led to widespread condemnation by the US, it’s NATO allies and other countries across the world, who have adopted sanctions on the Russian central bank and retail banks whilst freezing the assets of Russian elites. Heavier sanctions are likely to follow over the coming days and weeks where the objective is to effectively cut Russia off from Western financing, and to implement restrictive monetary conditions similar to those imposed on Iran not too long ago. There is also a possibility of MSCI kicking Russia out of its Emerging Markets index, which could continue the rout in the Russian equity market, which fell as much as 45% on Thursday 24 February, but paired some of those losses and ended 33% down.
Chart.1 Russian MOEX Index daily performance
Most major markets are down modestly, given the geopolitical risk. Below is a table of market movements on the day of the invasion.
Chart.2 Market Index movements on 24 February 2022
Source: Trading economics
Most major indices were down between 2%-3%, with the US Equity market bucking the trend and ending in positive territory. US Technology ended the day strong, with the US100 Tech Index ending 3.05% up on the day. The largest movement in markets was energy stocks and oil, with brent crude oil breaching $100 intraday (the first time since 2014) and eventually settling below that $100 a barrel mark. Should the conflict continue to escalate, we could see oil stay above $100 a barrel for the foreseeable future, causing global energy inflation to rise.
Chart 3. Brent Crude Oil
So what does this mean for portfolios and should investors start panicking? The simple answer is no. History suggests that when analyzing times of crisis as a result of conflict, market drawdowns are about 5% on average, taking about 22 days to bottom while they tend to recover over a 47 day period on average. Chart 4 highlights many geopolitical crises that have occurred and the corresponding market movements that resulted.
We are monitoring the situation closely and cannot dismiss the severity of the situation as it looks to escalate. With this said, we have not changed our view of the global economy and the valuation of markets locally and abroad. As always, we continue to look for opportunities that may arise from market volatility. Should prospects arise to add exposure to discounted assets, notwithstanding the geopolitical and economic circumstances, we will take these opportunities while being mindful of the risks that are ever-present.