WEEKLY E-MAIL

25 February 2022

ESCALATION IN RUSSIAN/UKRAINIAN TENSIONS

By Patrick Malcolm

The last few days have seen a sharp escalation in the situation between Russia and Ukraine. We hope that the human and economic loss is minimal.

As a result, share markets have fallen.

S&P/ASX 200

Bond yields have also fallen, and oil prices have pushed to new post-2014 highs. The market reaction reflects a combination of uncertainty around how far the conflict will go and how severe their economic impact will be.

Trying to work out which way this goes is not easy. We are not geopolitical experts, and predicting whether the current tensions will escalate into full-scale war is beyond our expertise.

Every war is different, and there is no certainty around how the current tensions may play out. We recommend that investors remain diversified as a hedge against further conflict but refrain from getting overly negative in risk assets, such as shares.

We would not recommend altering a long term investment strategy for several reasons.

• Wars are unpredictable. When they start, their duration, the economic consequences, and who may get involved are all highly uncertain, making adjusting portfolios difficult to time.
• Historically, the impact on markets has been small and usually very short term in duration. During geopolitical events across the last 70 years, the average peak to trough decline is only 7%.
• Markets are usually at their weakest before the outbreak of war. The “prospect” of war adds to uncertainty– will they or won’t they. Once conflict begins, equity markets generally don’t weaken much further, and losses are usually recovered within a short time frame.
• Often conflict will manifest itself in less direct ways than the broader market. For instance, within energy markets (if conflict interrupts supply).

There is a long history of various crisis events impacting share markets. This includes significant events in wars, terrorist attacks, financial crises, etc. The following table shows crisis events since World War Two. In the first column is the period over which the US share market initially reacts. In the second column is the percentage share market fall. The third column shows the percentage change from the low over 3, 6 and 12 months in the final three columns.

Source: AMP Capital & Ned Davis Research

We think investors should hold their nerve. Conflict is never good, particularly given the potential for human causalities. However, if history is a guide, the impact on markets should be short and shallow, for most weakness is likely to have already been seen.

Patrick Malcolm

Senior Partner
Certified Financial Planner®
SMSF Specialist Advisor™
Barron’s Top Financial Adviser 2020
Authorised Representative No. 278061

If you have any questions or comments, please email me at patrick@gfmwealth.com.au

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