It has been six weeks since Russia sent troops into Ukraine, beginning what is perhaps the largest ground conflict in Europe since Germany declared war on France in 1940.
Already this has changed the world immeasurably, as well as sending shockwaves through the markets.
As the west has grouped together to impose crippling sanctions on the Kremlin’s elite, businesses have turned away from Russia, causing their economy to haemorrhage.
The decision to impose bans on Russian oil imports has marked a particularly moral turn in the investment world, with the US leading the charge with a complete ban and the UK planning to phase out its imports gradually to condemn Vladimir Putin’s actions in Ukraine further.
Elsewhere, European stocks are stumbling into correction territory, while already surging energy prices are now soaring even higher. This is all comes much to the concern of officials in Whitehall, where whispers of the dreaded R word are beginning to cause some unease.
History tells us that when the flames of war ignite, the stock markets tend to shrug it off
What happens next on the battlefield is anyone’s guess, and such events barely scratch the surface of the market reaction to the conflict so far. In truth, there are no guarantees about how the conflict will progress, or how the financial markets will respond.
With this in mind, how has the crisis affected investment trends so far?
How war affects the economy
First, it is important to acknowledge how war in general tends to impact the financial markets.
As serious as the current conflict between Russia and Ukraine is, history tells us that when the flames of war ignite, the stock markets tend to shrug it off.
Undoubtedly, the human costs of war can be devastating, but the bombing of Syria in 2017, the US withdrawal from Afghanistan, and the North Korean missile crisis all provide some pertinent examples that the market reaction to these events can be surprisingly mild.
Ultimately, most dips end up being bought, so medium-term investors can potentially find good value in bleak times.
A look back at World War II (1939-1945) shows that the Dow was up a total of 50 per cent throughout this period, more than 7 per cent a year.
Likewise, the US stock market was up a combined 115 per cent during two of the worst wars in modern history – such logic dictates that the relationship between geopolitical crises and market outcomes is not as simple as it may appear.
Assembling the ‘war puzzle’
But what about this specific situation? There is certainly something to be said about the fact that expectations of the crisis between Russia and Ukraine were largely dismissed before the conflict broke out.
Before the crisis began, UK and US intelligence officials were ratcheting up their warnings, however these forewarnings were largely dismissed by Kyiv. In cases like this where war starts as a surprise, the outbreak of a war can decrease stock prices.
However, when there is a pre-war phase, an increase in the war likelihood tends to decrease stocks prices, until the war ultimately happens, and stocks come back up again.
This phenomenon is known as ‘the war puzzle’, and there is no clear explanation as to why stocks increase significantly when war eventually breaks out after a preamble.
In recent weeks, defence analysts have been forecasting the potential avenues that this conflict could proceed down as well as the propensity for unexpected consequences and escalation to occur in the fog of war. Perhaps stocks also have a mind of their own in the midst of conflict.
A moral turn for investors?
I have already briefly acknowledged the fact that companies are increasingly turning away from Moscow. So far, 150 companies have completely withdrawn business with Russia – the likes of BP and Shell have divested massive assets, while companies like McDonald’s and Starbucks have ceased operations in Russia while continuing to pay dedicated workers.
This could potentially mark a moral turn within the investment landscape. Indeed, moving ahead, those who continue to do business with Russia may do so at a very high cost, as consumers and investors alike may boycott these companies in protest, which will have a knock-on effect on stock valuations.
Of course, the sanctions placed on Russia do not exist in a void. In addition to some nuclear sabre rattling, Putin has claimed that western sanctions are “akin to an act of war”, and as such, many experts expect the Kremlin to take retaliatory measures like cyberattacks to ward off any further intervention from EU and Nato members.
In terms of how this posturing translates to the markets, defence and cybersecurity stocks saw a sharp rise in value in the immediate response to Russia’s move into Ukraine, as investors took note of pledges made by the EU and the Biden administration to boost defence spending, as well as their warnings of a potential cyber blitzkrieg.
Many experts expect the Kremlin to take retaliatory measures like cyberattacks to ward off any further intervention from EU and Nato members
Raytheon Technologies, the US defence giant and the maker of the Stinger ground-to-air missile that Germany has pledged to supply Ukrainian forces with, saw its shares increase more than 10 per cent in the immediate aftershock of the crisis, while the Global X Cybersecurity exchange-traded fund rose 3.6 per cent.
Indeed, heightened geopolitical tension will continue to provide a strong tailwind for cybersecurity stocks.
An more optimistic read on the current situation would posit that the banning of Russian oil may fast-track the transition to net-zero, which theoretically would translate into an uptick in environmental, social and governance stocks and more eco-friendly energy solutions in the medium to long term, such as nuclear energy, biogas, biomethane and low-carbon hydrogen via electrolysis, as well as the technologies that will eventually make these goals a reality.
That said, as Russia is one of Europe’s largest energy suppliers, nations are likely to struggle in the short term, which is likely to mark a return to traditional fossil fuels and ‘dirtier’ commodities in the short term.
Ultimately, this is an incredibly grave and trying time, and investors will likely have more on their minds than their portfolios alone. Nevertheless, during volatile times like these, it is vital to have a clear strategy in mind to weather the storm.
Giles Coghlan is chief currency analyst at HYCM
