Russia Special: what the Russia-Ukraine conflict means for markets

A persistent pandemic, endlessly elevated energy prices, and now a conflict between Russia and Ukraine – the world can’t seem to catch a break.

As the conflict enters a third week, and Russia continues its assault undeterred by mounting Western sanctions, it's hard to envision a swift end to hostilities. But we’re not here to speculate on the minds of men. We do, however, feel fully qualified to assess the way forward for financial markets.

We can’t know the inner workings of Russia or Ukraine, Biden or Boris. But looking back through a series of conflicts from the Vietnam War to Russia’s most recent occupation of Crimea – in 2014 – we begin to see a pattern. Part of it is predictable: if a country is invaded, people understandably become fearful. When war is percolating, market participants pull their cash. Volatility rears its head, and markets tend to fall. The actual start of the war, as seen in the (subtly named) US invasion of Iraq, below, tends to coincide with the bottoming of risk assets, from which equities subsequently rise.

The reason for this is the localised nature of modern war. Taking a wide view of global GDP, regional invasions are unlikely to impact economic growth and/or the day-to-day workings of businesses outside the conflict area. Vietnam is an interesting case in point: while the US was deeply embroiled in that conflict, with many American soldiers famously drafted into combat involuntarily, the fighting took place entirely in Asia. Following the (euphemistically named) Gulf of Tonkin Resolution in the summer of 1964, US involvement ramped up, and in short order the US-based S&P 500 resumed its upwards journey.

Before the bounce-back comes the bear

But before things start seeming too rosy across the continent from Ukraine, we’ll state in black and white that markets are falling. And while it’s impossible to predict the best time to sell, there is, as we’ve detailed thus far, compelling historical evidence for when may be the right time to buy. Periods of high volatility, perhaps antithetically, are generally times when there is lower risk. A fall of 10% in the stock market is officially considered a correction, and a point in time in which investors are often driven to sell. But doing so means you’ll miss out on the bounce-back, which, as we’ve previously suggested, almost always comes. This is what we mean when we advise taking a long-term approach to investing. As a recent example, consider the trajectory of developed markets over the past three years, as illustrated by the S&P 500.

In retrospect, March 2020, in which Covid-19 acquired pandemic status, would have been a good time to buy. Another comforting point to consider is the rarity of bear markets (technically speaking, a fall of 20%). As charming as it is to think of the ups and downs of financial markets as the bull and the bear, the latter is in hibernation for the vast majority of time. In fact, US data going back to 1927 shows that there’ve only been 11 instances of a bear market in that nearly 100 years of history. Put another way, bear markets only happen 5% of the time. During the other 95%, we’re experiencing a bull market – i.e., it’s rising. There is upside to be captured if you have the patience to ride out the lows.

Where you will feel the pressure

Most geopolitical conflicts will lead to inflation and pressure on commodity prices, which are unwelcome developments given how these areas are currently faring as the pandemic fades. War in Ukraine is likely to exacerbate these issues, which means prices for goods and energy will continue to climb. Commodities are already in short supply; inventories are low globally, so any further disruption to the supply chain is going further inflate costs.

We’ve established that it’s impossible to predict when the market will begin its descent. So if you can’t time the market, what should you do? Once the market falls by 10%, you need to switch your mindset; more specifically, you need to ignore the pessimistic news flow and look for quality assets that can now be purchased cheaper. Take a critical eye: look around for companies that have been unfairly sold down and add to those positions. A 10% pullback is a good time to selectively add; keep tilting your portfolio to maximise returns while sticking to your overriding long-term plan. This will ultimately minimise risk.

While we desperately hope for a swift de-escalation to the violence in Ukraine, we can advise that you don’t worry about your financial affairs. Stay the course, buying selectively when there’s value to be found. Keep calm and carry on with your long-term plan.

“Since 1927, the US equity market has only spent 5% of its time in a bear market”

Sanlam is a trading name of Sanlam Private Investments (UK) Ltd (SPI) (registered in England and Wales 2041819), Sanlam Wealth Planning UK Ltd (SWP) (registered in England and Wales 3879955). Registered office for SPI and SWP: Monument Place, 24 Monument Street, London EC3R 8AJ.

08 March 2022
Mind the gap!
02 March 2022
Time to split

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Professional investors only. The value of investments and any income from them can fall and you may get back less than you invested.