Market Update: Ukraine


The media is currently being dominated by the geopolitical crisis in Ukraine so I thought it opportune to share our thoughts on what has happened, put it in context and postulate what impact this could have on financial assets.

Russia has recognised two breakaway Republics that are formally part of Ukraine but which have been engaged in violent insurgency since the time of Russia’s annexing of Crimea in 2014. These regions have high percentages of ethnic Russians.

As can be seen from the map below, Russia has been concerned by the expansion East of NATO since 1997.They are paranoid about Ukraine being next to join and/or align with NATO and have thus taken steps to (in their eyes) stop NATO in its march eastwards.

As of today the retaliatory sanctions from the West have been very mild and this is perhaps a tacit acceptance that thus far Russia have moved to the very limit of what is digestible to the West (ex Ukraine) but stopped just short of an unacceptable full invasion.

Whilst a very aggressive act and contrary to international law, history implies that if Russia stops here then the financial market impact will be contained and a base from which they can recover will shortly be found.

Please see the table below from JP Morgan which supports this view. It highlights the extent and duration of geopolitical events on the S&P 500, which we can use as a proxy for global equity markets.

The S&P is now flirting with a 10% correction from the all-time high attained in late December whilst the more highly valued (in terms of Price Earnings) NASDAQ has fallen 15%. Russian equities are down 30% and European equities have suffered noticeable declines. Indeed many stocks are down between 20 and 40% from their highs. This is because the Ukrainian flare up came at a time when investors were fretting about inflation and consequent interest rate rises so both bond and equity markets were already under pressure.

However, as we have previously explained, we think investors have moved very quickly from vastly underestimating the threat of inflation and rate rises to being somewhat hysterical about it. There have been cases of extrapolation gone wild as algorithmic and meme traders have increasingly influenced markets. Our portfolios have been saved from the worst of the fallout by being diversified and underweight the most severely affected areas and were somewhat prepared for more financial market turbulence, as referred to in our Q4 commentary.

If history is any guide, we will judiciously take advantage of the fallout as we view the real economy to be in the relatively early stages of a rebound from the pandemic, Trade Wars, Brexit and Chinese policy induced slowdowns.

An old adage is sell on the sounds of trumpets, buy on the sound of cannons. That adage probably still has resonance today. Out of crisis comes opportunity!

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