Please find below, an update on how Russia’s conflict with Ukraine will impact markets, received from Brewin Dolphin yesterday evening – 24/02/2022
As Russian forces invade Ukraine, Guy Foster, Brewin Dolphin’s Chief Strategist, analyses the impact on stock markets, the economy and investors.
Stock markets around the globe have slumped on news that Russia has launched a full-scale invasion of Ukraine. What are the implications for investors, and does this change the equity market outlook?
How have stock markets reacted?
Stock markets have taken today’s news badly because it represents the ebbing away of the potential for peaceful de-escalation. At the time of writing, the pan-European STOXX 600 is down 3.8% and Germany’s Dax has shed just over 5%, reflecting the country’s heavy reliance on Russian energy supplies. The commodity-heavy FTSE 100 has lost 3.2%, with surging oil prices helping to limit losses.
Today’s stock market sell off is a continuation of the heightened volatility we have seen in the first two months of the year. Escalating tensions in the weeks leading up to the invasion, coupled with the risk of rising inflation and interest rate hikes, have been weighing heavily on investor sentiment.
The major risk to stock markets right now is the increase in uncertainty. When uncertainty rises, the ‘risk premium’ increases. In other words, equity valuations fall as investors require higher potential returns to compensate for the higher perceived risks. There is also a risk of contagion to emerging markets more broadly.
The reason why markets are so focused on the current conflict is that Russia is an important source of, and Ukraine is an important transit country for, oil. Supply disruption could lead to further increases in the price of oil, which could exacerbate already high inflation in Europe, resulting in continued market volatility.
What is the potential economic impact?
At this early stage, it is difficult to predict the economic impact.
First, we do not know what Russia’s ambitions are for Ukraine. It is also unclear how long the conflict could last, although the news coming through suggests Russian and Ukrainian military forces are balanced in number, and so the conflict is unlikely to be easily won either way.
Second, while sanctions could hold back Russia’s economic growth, Western leaders generally have a very limited range of sanctions that they are willing and able to deploy. Cutting off Russia from financial markets would only have an impact when it comes to seeking financing. Russia doesn’t need to do this while energy prices stay high.
Some have suggested barring Russia from the SWIFT communication system that facilitates international money transfers, but that would seem to impede payment for much-needed Russian gas supplies. In all likelihood, sanctions will focus on individuals and some Russian institutions; there will be great reluctance to threaten commodity supplies upon which Europe, in particular, is heavily dependent.
If sanctions did cause economic disruption in Russia, this is unlikely to have much of an impact on global growth, as Russia’s economy represents only around 1.8% of global gross domestic product. The much greater concern is the extent to which disruptions to oil supply could dampen economic growth more broadly.
What is the longer-term outlook?
While events in Ukraine are extremely concerning, it is worth bearing in mind that from an investment perspective, steep declines in stock markets are not unusual, and they tend to be short lived. History shows us that equities have been resilient during periods of crisis in the past, such as the Cuban Missile Crisis, the Iraqi invasion of Kuwait, and 9/11. The impact of these events on the markets, and indeed the economy, were much more fleeting than their significance in modern history.
Stock markets tend to be disconcertingly dispassionate about political and human tragedy unless it has an overt economic impact. They also tend to anticipate geopolitical risks in advance, which means the onset of conflict can often be the moment that uncertainty peaks. So, while stock markets are likely to remain volatile in the short term, this may be more to do with ongoing concerns about inflation and interest rates. The longer-term outlook for the global economy and equities remains positive as the pandemic-related headwinds reduce, with job and wage gains becoming more common. The events in Russia will contribute to the overall framework we have for assessing the opportunities to grow wealth over the longer term.
Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses
David Purcell
25th February 2022