The horrific images coming out of war-torn Ukraine have shocked the world. Sources are saying that over 1.5 million Ukrainian refugees have fled the country and hundreds of casualties have been reported. Our thoughts and prayers have been and will continue to be with those impacted by this senseless war, especially civilians and those who are most vulnerable. It is impossible to say when the conflict will end and what will be the long-lasting effects, but we offer our thoughts on where things stand currently.
None of our ETFs currently hold Russian securities. In the past, we have held one Russian stock that was a US American Depository Receipt (ADR) and that was not a state-owned enterprise. However, given the current situation, it is our position to not own any Russian shares for the foreseeable future based on the country’s human rights abuses.
The Ukrainian people have fought courageously, more so than many had predicted. However, Russia has a distinct advantage, and even if it takes longer than expected, Putin will not stop even if it means leveling entire cities as Russian forces did in places like Aleppo, Syria. Unless other governments get involved in the conflict (which they have been reluctant to do), it seems inevitable that Ukraine will fall into Russia’s hands.
Russia may win the battle in Ukraine, but will it win its war? Not likely. The West has been unified in its condemnation of Russia and the imposition of sanctions. Although China and India may continue their current dealings with Russia, the economic impact from the rest of the world will leave the country in economic ruin and unable to pursue its desire to restore Russia to its former USSR glory, especially if a unified ban on Russian crude imports is enacted.
We are already seeing revised forecasts for lower global economic growth (primarily as the result of economic sanctions) and higher energy prices as a result of the conflict. Europe’s economy has been impacted more than the US (given Russian oil and gas imports). At this point, we do not feel that the conflict will lead to a recession in the US (due to strong consumer demand, less dependence on Russian oil, and a still mostly dovish Federal Reserve), although the risk of recession in Europe has greatly increased. Before the Russia/Ukraine conflict, the Fed seemed poised to focus its attention on inflation, with some analysts predicting even more than a 1.0% increase in the Federal Funds rate in 2022. Given the new geopolitical reality and the potential economic upheaval, the Fed is likely to be less aggressive in its tightening plans than just a few weeks ago, and a 25-basis point March rate hike seems like the most probable outcome, with a total of 3 or 4 similar hikes for the year.
As of this writing (3/7/22), the broad US stock market (S&P 500 Index) is down over 8% year to date, with the US fixed income market (BB US Agg) down over 3%. Although Russian markets are currently not trading, Russian stock listed in London lost more than 90% of its value before getting suspended.
Markets don’t always behave rationally, as we have seen in recent years. Usually, the stock market declines from geopolitical events average about 5% before bouncing back. If the conflict is isolated, a similar pattern could play out this time. However, if the conflict has contagion effects (e.g., China invading Taiwan, or Russia advancing to other Eastern European countries) and moves beyond Ukraine, the impact will be much more severe and long-lasting.
If you have any questions, do not be shy about reaching out to your investment advisor. It is critical in emotionally charged times to have professional guidance that can help bring a long-term perspective and avoid knee-jerk reactions that can have potentially damaging long-term consequences on portfolio values and your ability to reach your financial goals.