Capital Ideas^TM

Russia’s military aggression against Ukraine, which has become Europe’s largest ground war in generations, has impacted millions of people and triggered a large-scale humanitarian crisis as vulnerable Ukrainians take shelter or flee their homes. The intensification and spread of the conflict is deeply troubling and is having a devastating impact on those people caught in the crisis.

This article focuses on potential market and economic implications of the conflict.

Russia's invasion of Ukraine has sent shockwaves throughout the world. With more questions than answers and even fewer clues as to what the end game could be with regards to the escalating conflict, the natural reaction for investors is to adopt a ‘risk-off’ approach and take comfort in safe-haven assets.

Looking back at similar geopolitical events over the past four decades and using the S&P 500 as our reference, equity markets did experience short selloffs at the onset of these incidents. Over a longer timeframe, however, equity markets have consistently been able to power through such geopolitical volatility and come back stronger than before. This has proven true be it the First and Second Gulf War, the 9/11 attack, Russia’s invasion of Crimea or the US-China trade war. 

Even though investors should by now be familiar with the standard ‘past performance is no guarantee of future results’ warning, the chart does offer a strong argument that rushing for the exit sign whenever geopolitical tension rises may not be the wisest option. This is particularly true when it comes to the Russia-Ukraine conflict as the situation remains very much fluid. Consequently, the possible outcomes for politics, the global economy and markets are even less clear at this stage.

This current situation, while concerning and disruptive for so many, is an ample reminder of the benefits of long-term investing. In addition, turmoil and steep market declines can provide opportunities for active managers. Instead of reacting prematurely to market volatility, greater value could be found by adopting a long-term view in identifying and investing in companies with enduring and appealing prospects.