Should investors panic as geopolitical tension mounts, amidst Ukrainian/Russian conflict?

This 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 recapture the imagination of a former Soviet Union.

This has led to widespread condemnation by the US, its NATO allies and other countries across the world, followed by sanctions on Russian banks and outside investors continuing to trade Russian instruments, both equity and capital in nature. Heavier sanctions are likely to follow over the coming weeks with the objective being to effectively cut Russia off from Western financing, and restrictive monetary conditions similar to those imposed on Iran not too long ago.

There is also a possibility of the 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 end 33% down.

Chart.1 Russian MOEX Index daily performance

Source: Trading Economics, 25 February 2022

Most major markets were down modestly yesterday, given the geopolitical risk, however post that have recovered today. At the moment all major markets, barring the US and Canada are trending positive. Below are market movements on the day of the invasion vs today.

Chart 2. Market Index movements on 24 February 2022 (Invasion day)

Source: Trading Economics, 25 February 2022

Chart 3. Market Index movements on 25 February 2022 (Friday)

Source: Trading Economics, 25 February 2022

Most major indices were down between 2%-3%, with the US Equity market bucking the trend on Thursday, however the picture looks quite different on Friday. At the time of writing this yesterday, we saw US Stocks declining during the course of Friday morning and early afternoon . On Thursday US Technology ended the day strong, with the US100 Tech Index ending 3.05% up on the day, On Friday however by early afternoon both were in the red.

The largest movement in markets on Thursday was in 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.

Friday we saw the price hovering around the $98 mark. Should the conflict continue to elevate, we could see oil move and stay above $100 a barrel for the foreseeable future and potentially see global energy inflation rise, being negative for cooling inflation globally and especially in the US, who have seen inflation breach 7% this year.

Chart 4. Brent Crude Oil

Source: Trading Economics, 25 February 2022

So, what does this mean for portfolios and should investors start panicking?

The simple answer to this question is ‘no’.

History suggests that when analysing times of crisis as a result of conflict, market drawdowns are about 5% on average, taking about 22 days to bottom and tend to recover over a 47-day period on average. Chart 5 below highlights the many crises that occurred and the corresponding market movements.

Chart 5: Geopolitical events and Stock Market reactions

Source: LPL Research. S&P Dow Jones Indices, CFRA, 01/06/2020

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.

We remain vigilant about the potential opportunities that arise from continued market movements to the downside thus far. Should there be prospects to add exposure to discounted assets, notwithstanding the geopolitical and economic circumstances, we will grab those opportunities while being mindful of the risks that are ever-present.

Regards

Glacier Invest