IN FOCUS6-8 min read

Russia and Ukraine: uncertainty ahead

Markets have responded with alarm to Russia’s invasion of Ukraine. We anticipate further volatility.

28/02/2022
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Authors

Caspar Rock
Chief Investment Officer

The situation in Ukraine has taken a turn for the worse with potentially grave humanitarian consequences.

Five days after Russia's invasion, fighting continues. Ukraine's resistance and the response from the country's Western allies have both been stronger than expected. Over the weekend, the US, UK and EU agreed to unprecedented sanctions on Russia's central bank and banking system. Germany has also surprised the international community with its announcement of a 100 billion euro increase in defence spending.            

Market responses

Russia's invasion prompted a sharp reaction in markets. Equities have experienced high levels of volatility. Oil prices have risen above $100 for the first time since 2014 as investors worry about disruption to energy supplies. 

Recent developments give rise to a number of economic concerns. Firstly, while the Russian economy is small, measures against the Russian banking system - including its central bank - raise the risk of financial contagion, especially in Europe. 

Secondly, the risk of "stagflation" - a period of high inflation and falling or negative growth - has risen. The possibility of restrictions on Russian commodity exports has prompted sharp rises in the price of many raw materials, not just oil. This will mean inflation continues to move higher over the coming months. At the same time, growth is likely to suffer as higher food and energy prices erode disposable income and consumers become more cautious. This will complicate central banks’ efforts to fight inflation and markets are likely to remain volatile as investors grapple with the rapidly evolving macro-economic outlook.  

Portfolio positioning

Heading into recent events, we had a very slight “overweight” position in equities compared to our long-term target allocation. However, we have also been adding to diversifying assets in recent weeks – including commodities and absolute return funds – helping to protect portfolios from recent volatility. We do have limited exposure to Russian and Ukrainian assets through some of our emerging market funds - however this is minimal at a portfolio level (approximately 0.5% of our balanced strategy).

We continually review portfolios and have done so following the latest developments. We are satisfied our positioning remains appropriate.

Over the coming days and weeks, volatility could present opportunities to add to portfolios. We continue to see attractive opportunities in select areas of the equity markets, as well as alternative assets. However, we would advocate adding across asset classes, rather than solely to equities. This helps ensure portfolios remain appropriately diversified and have sufficient “defensive ballast” in the event of further stock market falls.

Geopolitical crises: a look back in history 

As the data below suggests, markets have tended to recover quickly from wars and other geopolitical shocks – especially when the US economy is not in recession. We do not envisage a recession in the US over the next year. 

S&P500 performance around select geopolitical / military events

Date

Geopolitical / military events

1 month later

3 months later

6 months later

12 months later

December 1941

Pearl Harbour

-3.4%

-12.7%

-9.1%

0.4%

October 1956

Suez Canal crisis

-2.8%

-3.8%

-0.1%

-11.5%

October 1962

Cuban missile crisis

8.7%

17.7%

25.1%

32.0%

October 1973

Arab oil embargo

-7.0%

-13.2%

-14.4%

-36.2%

November 1979

Iranian hostage crisis

4.2%

11.6%

3.8%

24.3%

December 1979

USSR in Afghanistan

5.6%

-7.9%

6.9%

25.7%

August 1990

Iraq invades Kuwait

-8.2%

-13.5%

-2.1%

0.1%

January 1991

Gulf War

15.2%

23.5%

20.6%

33.1%

August 1991

Gorbachev coup

0.0%

3.0%

7.0%

8.9%

February 1993

World Trade Centre bombing

1.2%

2.5%

4.0%

6.4%

September 2001

9/11

-0.2%

2.5%

6.7%

-18.4%

March 2003

Iraq war

2.2%

15.6%

17.4%

28.4%

 

Average

1.3%

2.1%

5.5%

8.6%

 

% Positive

50%

58%

67%

75%

Source: Truist IAG, Factset. Bold rows represent down markets where the economy was in recession at some point during the measurement period.

Important information

This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. The content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.

Authors

Caspar Rock
Chief Investment Officer

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