Russia-Ukraine Tensions Reach Boiling Point

We are closely monitoring the situation unfolding on the Russia-Ukrainian border. We are aware of developing stories regarding Russia’s intent to make independent two regions in eastern Ukraine that are populated in large part with pro-Russian separatists – Donetsk and Luhansk. There are also reports emerging of shelling attacks between the Ukrainian national forces and Russian forces at the border. European equity markets, Russian equity markets, global bond markets, and energy markets are reacting quite adversely to these developments. Prior to his Monday afternoon remarks, Russian President Vladimir Putin indicated his intent to continue talks with both European and US leaders. The situation has added to uncertainty in markets and the unpredictable nature of the Kremlin assures little clarity is likely to emerge. The simplest way to describe the origins of this situation in that Ukraine is on a path to join NATO, which Russia vehemently opposes, because Russia does not want NATO presence surrounding its western border.

We may very well see a negative and risk-off reaction from US markets as they re-open from the President’s Day holiday this morning, 2/22. However, as is the case with most geopolitical events of this type, we expect the negative ramifications in markets to be short-lived. Based on historical data of past geopolitical events through two charts at the end of this piece, we can see that even though these crises garner significant mainstream media attention and have serious humanitarian tolls, they often have little market impact one-to-two months after the onset of the event. Russian equities make up less than 0.35% of our equity portfolios and Ukrainian exposure is near-zero.

Russia makes up less than 0.40% of the investable global stock market index (MSCI ACWI Index) and makes up only 3% of the entire emerging country stock market index (MSCI EM Index). Russia is the third-largest producer of oil in the world, preceded in production by the United States and Saudi Arabia. Russia is the 11th largest economy in the world by measure of GDP, and Ukraine is the 55th. Russia is also the main supplier of oil and oil-related products to the European Union. Both European and US leaders have threatened severe economic sanctions against Russia should they invade Ukraine. Oil and oil-related industries make up over 30% of Russia’s GDP. Russia risks severely hamstringing their domestic economy if they invade Ukraine, while US and European leaders may see the risks as long-term security and stability in the European region, along with risking the staying power of NATO on the world stage.

While this conflict has significant humanitarian implications, effects on global financial markets are likely to remain short-term in nature and immaterial for long-term investors. We’d recommend making no portfolio changes on these developments and simply allowing this situation to play out while waiting for more certainty. The media will undoubtedly give this conflict attention on a grand scale, but always keep these events in the context of your long-term portfolio goals. Inflation, monetary policy, COVID, and supply chain issues are still likely to be the main drivers in the stock market and the global economy throughout 2022. We will continue monitoring global market reactions and new releases related to this situation. Don’t hesitate to reach out to our team with any questions.?

Source: MSCI

Sources: LPL Research, MSCI, Morningstar, Associated Press, Reuters, BBC, World Bank, IMF, Statista

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy assures success or protects against loss. The economic forecasts set forth in this material may not develop as predicted.