It has been less than a week since Russian military forces invaded Ukraine and already pundits
are predicting dire global economic and investment consequence. Still, the outlook is very uncertain as no one can predict how sanctions will affect President Putin’s actions, as well as those of other actors in this crisis. Uncertainty is never a time to change one’s long-term nonprofit endowment investment strategy. Suddenly liquidating to cash to “wait for the bottom” could mean buying into the recovery too late. Alternatively, speculating on market winners and losers is likely to be based on premature or ambiguous conjecture, potentially leading to large losses. Besides, large institutions with access to algorithmic trading have already made their bets and will drive markets. A sound long-term investment strategy is intended to withstand significant shocks. With this said, the following factors are likely to come into play.
Trade
Ukraine’s trading partners have become more diverse over the last decade, with the E.U. representing over 40% of both imports and exports in 2019. Compare this with Russian trade, which has steadily declined and in 2019 hovered around 10%. Imports originating from China to Ukraine have also leapfrogged Russian imports. This means any disruption to Ukraine’s balance of trade will be felt across the globe as supply chain bottlenecks persist.
Inflation
Global oil prices hit $105 per gallon—the highest level since 2014. Gasoline prices in the US, which already increased 51% in 2021, will likely be pushed even higher due to the Russia-Ukraine crisis. Food prices are also likely to spike as Russia and Ukraine are significant exporters of wheat. The decrease in supply will force importers of Russian and Ukrainian wheat to drive prices up. Russia is also home to major metal producers and the recent sanctions against them will cause aluminum, nickel and copper prices to skyrocket.
Stock Markets
On February 24, stock markets around the globe whipsawed, with many broad market indices down nearly 3% by midday, only to recover by the day’s end. The S&P 500, consisting of large capitalization stocks, ended up 1.5% and the tech-heavy Nasdaq ended up 3.3%. Even the FTSE 100, an indicator of London Stock Exchange performance, rallied to finish 3.9% positive. But volatility will likely be the norm in the coming months due to continuing concerns over global trade, inflation and general uncertainty with respect to the conflict in Ukraine.
Bond Market
February 24 saw bond yields drop (bond prices increased) as investors sought safety in fixed income markets. This March the Fed is expected to raise interest rates a quarter of a percent aimed at curbing inflationary pressures. The conflict in Ukraine will definitely put the Fed on alert but will unlikely change its plan to tighten rates.
Despite the uncertainty, markets have proven resilient and that is why we advocate sticking to your long-term investment plan. This means that when investment asset prices in your portfolio change significantly, we rebalance your portfolio: we sell positions that are above the specified target to buy asset classes that have dropped in price. This keeps your portfolio on track to meet your target objective.
We’re here to talk or meet with any clients who have further concerns.
Sources
AJG Simoes, CA Hidalgo. The Economic Complexity Observatory: An Analytical Tool for Understanding the Dynamics of Economic Development. Workshops at the Twenty-Fifth AAAI Conference on Artificial Intelligence. (2011)
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