5 min read 22 Mar 22
Summary: Russia’s war in Ukraine has caused a humanitarian tragedy. It has also triggered uncertainty and turbulence in financial markets. One strategy to deal with this challenging situation could be avoiding panic and analysing past instances of market turbulence for useful lessons.
Russia’s recent invasion of Ukraine has caused shock and sadness around the world. While the unfolding humanitarian crisis is clearly the most important aspect of this situation, the war has also created a great deal of uncertainty for investors.
At this stage, we don’t know how long the conflict will last or the full extent and impact of sanctions. We are also unaware of the full impact the invasion could have on the global economy or financial markets. Despite the lack of clarity at the moment, what we do know is that markets have historically shown long-term resilience when it comes to coping with more extreme global events. Investors’ initial reaction to Russia’s military attack has been one of panic. Since the start of the invasion on 24 February, the FTSE 100 Index, an index of the largest UK-listed companies, fell sharply in March. Global equity performance (as measured by the MSCI All Country World Index, an index of the shares of companies around the world) has also taken a dive in March.
One of the reasons why the war in Ukraine has unsettled investors so much is that Russia plays a key role in the global energy market. It is a leading producer and exporter of both oil and natural gas. The Russia-Ukraine crisis, therefore, could lead to one of the largest energy supply shocks ever if the country’s oil and gas exports are disrupted even more than they currently are. At this stage, only the US and UK have banned the purchase of Russian oil and gas. European nations, such as Germany, which are much more dependent on Russian energy sources, have held off such a move, although there are plans underway to reduce their imports of Russian gas. The uncertainty about potential bans has already led to oil prices having jumped by around a quarter in March.
Aside from energy, Russia is also one of the world’s largest producers of raw materials. Since the outbreak of war, we have seen sharp price rises in many raw materials that are traded as global commodities, such as nickel, aluminium, zinc and copper. Many of these metals are important components in everyday items like cars and batteries. It is anticipated that these price rises will feed through to the costs of these items, thereby putting pressure on consumers. The price of gold, which is seen as a safe haven by investors, is also up.
Even more worrying, higher food prices could be another important negative effect of the events in Ukraine on the rest of the world. With Ukraine being a large source for the world’s wheat – making up around 10% of the global export market, according to USDA data. Futures contracts for wheat have seen a surge of more than 60%; this will feed through to household food budgets.
The chart below shows the UN Food and Agriculture World Food Price Index, which is a measure of the monthly change in international prices of a basket of food commodities. The end of February 2022 saw a new all-time high and up 3.8% from January before the Ukraine-Russia crisis began.
Source: Bloomberg, 28 February 2022
Rising prices will put the focus back on central banks and how they are going to tackle inflation – one way might be with central banks raising interest rates in the coming months. This further shows how the war is impacting everyone somehow – higher interest rates will dampen daily spending and raise borrowing costs.
There will be implications for the global economy, however, we must try to keep a sense of perspective.
After all, this is not the first time we’ve seen a crisis affect oil prices and commodities. Just two years ago the outbreak of the COVID-19 pandemic dealt a significant blow - seldom have global stockmarkets fallen so sharply as in early March 2020. That said, stockmarkets did rebound quickly once effective vaccines were developed and it became clear economies would reopen again.
Of course, the economic recovery that was underway in the wake of the pandemic is now severely threatened by the war in Ukraine and heavy sanctions on Russia. The consequences of this conflict are certainly far reaching, as we’ve explored above. However, historical patterns show that uncertainty has often proved temporary, with only minimal long-term impact on asset prices, if any.
Given the considerable uncertainty right now and the turbulence in financial markets, probably the worst thing to do at a time like this is giving in to knee-jerk reactions – either by panic-selling or panic-buying, for that matter – for investments, as with anything else.
While it may be uncomfortable at times, sticking to your long-term financial plan may leave you better off in the long-run than switching tack. There may be a long way to go in this terrible conflict and we may see further twists and turns in markets yet.
As ever, M&G’s fund managers remain resolutely focused on their longer-term objectives. By ignoring the market noise and focusing on the fundamentals, they look to actively manage risks and capitalise on the opportunities thrown up in choppy markets like we are seeing.
This crisis is different, but the response to how we deal with turbulent markets can be the same as in the past – remember that there is benefit in diversifying your investments across different types of assets to help insulate your portfolio.
Please bear in mind that M&G are unable to give financial advice. The views expressed here should not be taken as a recommendation, advice or forecast.
The value of any fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.
The views expressed here should not be taken as a recommendation, advice or forecast.
The value and income from any fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that any fund will achieve its objective and you may get back less than you originally invested.