Long ReadApr 26 2022

Russia and Ukraine: how are investors reacting?

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Russia and Ukraine: how are investors reacting?
Credit: Unsplash

It has now been two months since Russia first sent troops into Ukraine – an event that, by all accounts, has caused mass devastation and roiled the global markets.

As with any crisis of this magnitude, the media has been rife with headlines prophesying the various avenues that the war could follow, the progress of peace talks, and even the potential for long-term market unrest.

It goes without saying that the most important consequence of the military actions is the tragic human cost, rather than the day-to-day happenings of the stock market, but inevitably the conflict does bring with it significant consequences beyond the borders of Ukraine.

One such consequence has been the initial stock market reaction; when Russia first sent troops into Ukraine, global share prices headed southwards, with the UK’s FTSE 100 index losing 7.2 per cent of its value from February 23 to March 7.

Despite what many might expect – that is, a reactive response to the conflict – investors are taking a ‘wait and see’ approach. 

In March the S&P 500 saw its most drastic one-day drop since May 2020. Amidst a war with no end currently in sight, and mounting sanctions in place to cripple the Russian economy, inflation continues to surge and companies who continue to do business with Russia face reputational risks like never before.

With the situation quickly changing both on and off the battlefield, how is the crisis impacting investors?

Wait and see

Despite what many might expect – that is, a reactive response to the conflict – investors are taking a ‘wait and see’ approach. In fact, the majority appear unperturbed by the conflict, given that a mere 14 per cent claim to monitor the situation when thinking about their investment strategy, according to a recent survey conducted on behalf of HYCM.

Even fewer say that they have changed their strategy since the conflict first broke out, with just 10 per cent stating that they have taken action. 

Is this a surprise? Perhaps not as much as one might think. Despite the initial market volatility and media fanfare foretelling stock market corrections and ruinous consequences for the global economy, these actions do fall in line with general investment wisdom, which reminds us to keep a level head and shut off the news in the face of chaos.

Many investors are saying they would increase their investment in safe haven assets should the war escalate. 

Obviously, markets tend to react to geopolitical risks, however many individuals will be mindful of reacting to short-term events. Many may also be aware of the fact that some geopolitical risk indexes, which measure geopolitical risks throughout history, speculate that we are still not close to the level of risk seen in the aftermath of 9/11.  

In this instance, investors appear to be attuned to the fact that the market reaction to geopolitical events of this magnitude can be surprisingly mild. I have written about this phenomenon in the past, with events throughout history such as the North Korean missile crisis and the bombing of Syria in 2017 resulting in a curiously measured market response. Often, despite the scale of human suffering, the markets can be quite unrelenting.

This is not to say that investors are blind to the crisis and the prospect of a protracted conflict. A huge 69 per cent believe that this situation will result in permanent changes to the international trade and investment flows between Russia and the west – obviously a sentiment that demands significant consideration.

Moral driver

While just 14 per cent raised concerns about the effects of a protracted conflict and claimed that they were investing more carefully as a result, HYCM’s findings revealed an increasingly moral turn from investors.

Although just a small number (8 per cent) of retail investors are concerned that they rely too heavily on Russian assets and the expectation of a rouble crash, a much larger number (67 per cent) of respondents believe that consumers and investors will boycott companies who continue to do business with Russia, revealing an increasingly moral turn for the investment world.

Clearly, investors believe that these so-called ‘remainers’ should be adequately condemned for their failure to sever ties with Russia, with a further 44 per cent stating that they will reconsider their investments in companies that support Russia’s actions. 

In terms of other portfolio adjustments investors are weighing up for the future, with many saying they would increase their investment in safe haven assets should the war escalate or develop into an extended conflict, with this number increasing among those with the largest portfolios surveyed.

No doubt this is a provision that many believe could help them to guard against inflation, should the current situation worsen, and the likes of gold exchange-traded funds, government bonds, defensive stocks, cash investments and currencies will likely prevail in this instance.

Sustainability

Beyond the practicalities of portfolio management, the conflict has provoked a wider debate about environmental, social and governance investments. 

In recent weeks, journalists and thinkers have supposed that the war has driven home the importance of industry to provide safety and security to underdogs, and more generally a re-consideration of what constitutes ‘ESG’.

Some individuals are giving this some serious thought, with Sweden’s SEB bank in particular making a U-turn on its sustainability policy that excluded defence stocks from its funds. Now, six funds will be allowed to invest in the defence sector in light of security concerns and geopolitical tensions.

Some investors have taken a more pessimistic view of the current climate, expecting that the conflict will set net-zero goals back. 

Following this logic, one in four (25 per cent) of investors surveyed on behalf of HYCM plan to invest in defence stocks if the conflict escalates, meanwhile many of those with the largest portfolios believe that stocks in the defence industry should now be considered as legitimate ESG investments.

Elsewhere in the ESG arena, investors will be re-calibrating their outlook on the global energy markets, with Russian oil and natural gas now off-limits.

Although the UK is not heavily dependent on Russian energy supplies, which make up 8 per cent of total oil demand and less than 4 per cent of the UK’s natural gas supply respectively, global commodity prices have surged which could have structural implications on long-term supply. 

As such, the majority (59 per cent) of investors believe that long-term uncertainty in the energy markets will result in a turn to green metals, nuclear energy and ‘cleaner’ energy stocks in the long term.

That said, half took a more pessimistic view of the current climate, expecting that the conflict will set net-zero goals back in the short term, with investors turning to ‘dirtier’ means of producing energy and fossil fuels. Indeed, it is already expected that the war will drive billions of dollars of new investment for fossil fuels – a very worrying prospect indeed.

While it is unclear at this point in time where the conflict will turn next, a more optimistic read of the investment landscape is that investors remain collected and un-reactive in the eye of the storm, with a healthy degree of wariness.  

Giles Coghlan is chief currency analyst at HYCM