Russia – Ukraine Conflict and Market Impacts

 

Russia – Ukraine Conflict and Market Impacts
Update 25 Feb 2022

As you are probably aware, tensions between Russia and the Ukraine have escalated with Russia launching military operations in the Ukraine on 24 February 2022. These types of crisis events can have a sharp immediate impact on investment markets, but history suggests they are usually short lived and followed by a rebound over the following 6-12 months.

If you are considering making changes to how your super is invested, we recommend speaking to a financial planner first to avoid making any rash decisions that may reduce your long-term financial position.

The last two weeks have seen a significant escalation in the conflict between Russia and Ukraine, with Russia recognising the independence of two regions in the Donbas area of eastern Ukraine that have been controlled by Russian separatists since 2014. This was closely followed by the deployment of Russian troops into the two regions. Russia has since commenced military operations within Ukraine and warned Western countries that any interference could cause significant consequences.  

As a result of these geopolitical actions share markets have fallen recently, with US and global shares falling around 12% and Australian shares falling 8% since their recent peak at the end of 2021. Bond yields have also fallen due to safe haven demand and oil prices have pushed to new post 2014 highs.  

The market reaction is the result of uncertainty around how far the conflict will go, the threat of further sanctions and uncertainty about how severe their economic impact will be. In short, investors are worried about an economic shock to Europe and, to a lesser degree, the global economy generally. 

What has history taught us?  

There have been a number of crises in history with some of the more recent ones being: 

  • The onset of Covid – March 2020 
  • Brexit vote – June 2016 
  • Boston bombing – April 2013 
  • London train bombs – July 2005 
  • Madrid terror attacks – March 2004 

In each of these cases while there was an initial fall in share markets of between 3% and 30%, the following 12 months saw markets finish higher than before the crisis, with some recoveries occurring within 3 months. 

What’s coming next? 

The coming days and weeks will be critical as the world awaits Russia’s next actions, and the responses to them from the US, UK and other European countries. This will cause volatility in investment markets to continue, particularly in the prices of commodities such as gas and oil, which will flow through to higher inflation. Unfortunately, this means the high prices we’re currently paying for petrol will remain in the near term.  

However, while the outcome of the Russia-Ukraine conflict remains uncertain, the longer-term economic background remains positive as economies continue to reopen following the end of recent Covid-19 lockdowns. 

Should I make changes to how my super is invested? 

When considering current and future market volatility, it’s important to remember your super should be part of a long-term strategy.  

All EISS Super investment options are diversified to manage volatility risks and while portfolios may sustain short term losses, it is important to remember that superannuation is a long-term investment and will rise and fall with investment market cycles over time. 

For those who are concerned, here are some general tips. 

  • Share market falls are normal. The long-term trend for markets remains upward. 
  • Selling shares or switching to a more conservative investment strategy after a major fall usually locks in losses because correctly timing the rebound is very difficult and most investors only get back in the market after the recovery. 
  • While share markets have fallen, a diversified strategy does not experience the full impact of share market losses. Other more defensive assets like unlisted property, infrastructure, bonds and cash remain steady which provides diversified investors with some protection.  
  • The best way to stick with your long-term investment strategy and participate in the opportunities that may arise from this crisis, is to remain calm and turn down the noise bombarding us through the news and other channels. 

Before making any changes to your investments, we recommend speaking to a financial planner to avoid making any rash decisions that may reduce your long-term financial position. 

Further information about the conflict and its impact on the global economy 

At this stage the Western allies have commenced sanctions against Russian banks, freezing more than $1 trillion dollars in assets and, depending on the actions next taken by Russia, further sanctions could be imposed such as limiting purchases of Russia’s gas and oil supplies, although this would probably cause a self-inflicted recession within Europe. 

It is broadly accepted that any sanctions imposed on Russia are likely to result in retaliatory measures. The main channel through which Putin can inflict economic pain on the West is by constricting its energy exports. Europe relies on Russia for 27% of its crude oil imports and 41% of its natural gas imports.  

Over the past two years, Russia has already been restricting the natural gas it pipes to Europe, with volumes down by over a third compared with pre-pandemic levels. The risk now is that Putin will further reduce Russia’s gas exports to Europe, and potentially restrict Russia’s crude oil exports as well. The goal of these actions would be to create energy shortages in Europe, while pushing up global oil prices to a point where they begin to inflict political pain in the US from voters already struggling with a cost-of-living crisis. Unless a peace deal can be reached soon, Western European economic growth is likely to slow materially as governments would be forced to impose energy rationing on heavy industry.