Market Perspective: The Ukrainian Conflict

On February 24, Russian forces attacked targets across Ukraine after Russian President Vladimir Putin ordered an operation to “demilitarize” the country. Geopolitically, these are troubling developments, with many calling it an official end to the long Post-Cold War era that began in the early 1990’s.

This news is naturally alarming on multiple fronts. Our hearts go out to Ukrainian citizens as we wish for speedy peace. At home, you may also be concerned about how the developments will impact the financial markets and your investments.

Economic and market implications

Our Investment Strategy & Research team is closely monitoring how the conflict impacts the economy and financial markets. We’re not foreign policy experts, but we do understand market history surrounding larger geopolitical invasion events such as this.

We typically observe a drop in risk appetite, abrupt spikes in market volatility and a general flight to quality assets, including cash. We also tend to see sharp drawdowns in financial asset pricing and currency values, especially for key nations involved — all of which are happening now.

Iraq’s invasion of Kuwait in 1990 and North Korea’s 1950 invasion of South Korea provide some context for market impact. For the former, the S&P 500 index dropped 17% over a period of 70 days; and for the latter it fell 13% over a period of 23 days. We wouldn’t be surprised if the current market decline runs a little deeper given Russia’s key role in energy and agricultural exports, a global economy already struggling with inflation, and central banks having much less flexibility to respond.

Russia is a major producer and exporter of several commodities that are important to the global economy. Russia produces roughly 10 million barrels of oil per day, representing about 10% of global usage, with much of that oil shipped through Ukrainian pipelines. A larger war coupled with sanctions may cut off Russia’s export markets, which in turn, could lead oil prices to surge even higher. Given the existing tightness within commodity markets, this is an environment where even modest supply disruptions can have outsize impacts. This remains a key inflation, and possible recession, risk for the global economy and is something the Federal Reserve will carefully monitor.

Within the equity markets, Ukraine is no longer a component of the MSCI Emerging Markets Index or any of the major equity indexes. Russia started the conflict representing approximately 3% of the MSCI Emerging Market Index and less than 0.5% of the overall global equity index (MSCI ACWI). MSCI has since announced they are removing Russia securities from these indexes because of the aggression. Given the large amount of state ownership in Russian public companies, most active fund managers are underweight Russia. This means exposure to these two countries within most diversified portfolios would be insignificant and would not have a material impact on performance.

Beyond Russia and Ukraine, the impact will be felt throughout many areas of the financial markets and remain unpredictable. The pressure is greatest within Europe, but issues such as inflation will be impacted around the world. While unpredictable, it is important to monitor factors such as China’s response and support for Russia, internal reaction within Russia and the pressure put on Putin, Europe’s ability to withstand the pressure, government sanctions, and the risk to the overall supply chain of food and energy.

What it means for portfolios

While market conditions have clearly deteriorated in 2022, having a diversified investment portfolio with built-in shock absorbers such as bonds, diversifiers and defensive equities can help weather severe market impacts. Additionally, a valuation-driven strategy can dampen drawdowns by limiting exposure to the most expensive and vulnerable asset classes.

As with many geopolitical events, we are confident that long-term investment opportunities will present themselves in the months ahead as the situation continues to unfold. Until then, we patiently, yet earnestly, wait for the turbulence to subside.

Important Disclosures
Aspiriant is an investment adviser registered with the Securities and Exchange Commission (SEC), which does not suggest a certain level of skill and training. Additional information regarding Aspiriant and its advisory practices can be obtained via the following link: https://aspiriant.com.
Investing in securities involves the risk of a partial or total loss of investment that an investor should be prepared to bear.
Any information provided herein does not constitute investment or tax advice and should not be construed as a promotion of advisory services.
The views and opinion expressed herein are those of Aspiriant’s portfolio management team as of the date of this article and may change at any time without prior notification. Any information provided herein does not constitute investment or tax advice and should not be construed as a promotion of advisory services.
Past performance is no guarantee of future performance. All investments can lose value. Indices are unmanaged and you cannot invest directly in an index. The volatility of any index may be materially different than that of a model. The charts and illustrations shown are for information purposes only. All information contained herein was sourced from independent third-party sources we believe are reliable, but the accuracy of such information is not guaranteed by Aspirant. Any statistical information in this article was obtained from publicly available market data (such as but not limited to data published by Bloomberg Finance L.P. and its affiliates), internal research and regulatory filings.
S&P 500 is a market-capitalization weighted index that includes the 500 most widely held companies chosen with respect to market size, liquidity and industry. Indices are unmanaged and you cannot invest directly in an index. The volatility of any index may be materially different than that of a model.
MSCI Emerging Markets Index includes large- and mid-cap companies across 25 Emerging Markets, representing approximately 85% of the free float-adjusted market capitalization in each country.
MSCI ACWI includes large- and mid-cap companies across 23 Developed Markets and 25 Emerging Markets countries, representing approximately 85% of the global investable equity opportunity set.