Russia’s invasion of Ukraine has prompted further* sharp movements in markets and is an important reminder that geopolitical risk is a part of investing in global markets.
*It is worth noting this market volatility began at the start of the year as we wrote in last month’s #investment intelliGENce article and not just from the events of the last week or so.Geopolitical events like military or economic conflicts can affect stock markets in many ways. These events are normally widely followed by investors and as such, current market prices quickly incorporate expectations about the effects of these events on economies and companies.
In some cases, geopolitical events lead to market closures, as they have here with the Moscow Exchange, still closed and not expected to open tomorrow [Thu 3rd Mar].
This is not a solitary example. On June 27, 2015, Greece closed its stock market after defaulting on its government debt. The Athens Stock Exchange stayed closed until August 3 of that year. During the Egyptian revolution of 2011, the Egyptian Stock Exchange closed after January 27 and remained closed for over a month.
Neither are unplanned market closures limited to emerging markets. In 2019, the Tokyo Stock Exchange closed for 10 days after Japanese Emperor Akihito abdicated the Chrysanthemum Throne. In 2001, the New York Stock Exchange closed until September 17 after the September 11 attacks on the World Trade Center.
These types of market disruptions are not new, and the form that they take can vary. We’ve seen other examples over the decades, including currency repatriation restrictions in Malaysia in 1997, the introduction of capital controls in Argentina in 1999, and a successful coup d’état in Thailand that led to a market closure in 2006.
At times like these, it is wholly understandable to feel on edge and start looking for the exit. Any type of uncertainty brings concerns and I remember taking the same calls in the days following September 11, the run on Northern Rock in 2007 and more recently at the start of the Covid pandemic in 2020, three separate type of conflicts / economic events.
However, experience tells us – and past evidence confirms it – that even the worst sell-offs are usually followed by sustained periods of recovery.
First, let’s look at Russia specifically.
Historically, western markets have always been relatively unconcerned towards Russian territorial aggression. As the chart below illustrates, when Russia annexed the Crimea from Ukraine in 2014, markets were quick to dismiss the interruption.
The Soviet invasion of Afghanistan did see the Index start to sell-off on 17 December 1979 but it only fell for 12 days (down 3.8%) and was back to its previous level within six days.
As always, the key message is not to get sucked in by the noise. Over the medium to long term, the broader landscape of company earnings and the strength of the economic growth will far outweigh the importance of “conflict politics” for investors. Currently, even including its huge energy bills, total trade with Russia accounts for just 1.5% of EU GDP and only 0.5% of US GDP.
This is not just the case with Russia, the following chart illustrates the length of market falls during specific geopolitical events, the extent of the loss and the recovery to previous markets levels.
With the Second Gulf War, the S&P 500 started to sell-off on 21 March 2003 but this only lasted seven trading days (amounting to a 5.3% fall) and was back to the previous level within 16 days.
The 2014 events in Syria involved a longer sell-off (21 trading days from 18 September) but the 7.4% decline was wiped out in 12 days.
Recoveries are usually quick. This highlights the danger of trying to act quickly at such times. Remember the old phrase, never try to catch a falling knife.
To illustrate market resilience further, the table below shows some of the worst single-day falls for the MSCI ACWI^. In the table is also displayed the key event that caused the fall.
Across almost all time spans, returns have recovered significantly over the following one, three, five or ten years after, meaning those who managed to resist the urge to sell have (in most instances) seen their investments recover their losses and go on to perform very well.
This demonstrates that after previous selloffs, investors with a longer time horizon are best placed to hold their ground and remain invested.
Conclusion
From an investment perspective, the most significant effect of Russia’s invasion of Ukraine will likely be on inflation. This was already the key concern and Moscow’s military action has pushed up oil and gas prices, which is likely to mean inflation remaining higher for longer.
One of the most effective ways to mitigate the risk of unexpected events is through broad diversification and most investors will have well balanced portfolios so won’t feel the fall extent of market falls in any event.
It was only two weeks ago I posted the Time In The Markets article and my message from that, taking account of what is happening now, still stands.
^The Morgan Stanley Capital International All Country World Index (MSCI ACWI). The MSCI ACWI index is used as a benchmark for global equity funds and as a guide to asset allocation, it is a stock index that tracks nearly 3,000 stocks in 48 developed and emerging market countries.
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