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CIO Update - First reactions to the Russia / Ukraine crisis

24th February, 2022

As of this morning (Thu. Feb. 24th) stock markets were down over 10% on the year.  Declines of 10% happen on average at least every other year, so this is neither unusual nor unusually bad (see Figure 2 at the end).  The challenge for investors is that the trigger for such sell-offs can seem new or unexpected, which can make us worry that something fundamental has changed.  Ultimately the events of this week are unlikely to make much difference to long term growth nor to our clients’ long term objectives, so it is important not to overreact and deviate from our plans.

What’s happening?

First there is little clarity on what is happening on the ground in the Ukraine,  on how much of the country President Putin wants to occupy or subdue.  We have no special informational edge to predict his movements, and we wouldn’t base an investment strategy on trying to do so.  We can say that the chance of military intervention from western governments is extremely low, and any further escalation will come through sanctions and cyber-warfare.

What we do know from past geopolitical crises (see Figure 1) is that the typical market reaction is a decline of 5-10% and a recovery within 6 months or less.  As long as the crisis doesn’t cause or coincide with an economic recession, which would then cause a bear market (down 20%).  Of course markets were already down over 5% on the year due to fears of interest rate hikes.

Table of prior crisis events & subsequent market reactions

Likelihood of Recession

Russia and Ukraine together make up less than 2% of the world economy, so the direct economic impact will be very small.  The broader threat is higher energy prices and weaker sentiment.  We believe that neither Russia nor Europe want to take the extreme step of cutting off energy sales, and we note that this did not happen throughout the cold war. 

Oil prices are currently close to $100 a barrel. An extreme scenario (not our view) could be a spike to $150.  Economists estimate that this could reduce global growth by 1-2%, which would hurt, but still would not be enough on its own to cause a recession in the United States or globally.

Central bank reaction

Most of the stress in stock and bond markets this year has been caused by anticipation of interest rate hikes.  Last summer no hikes were expected for 2022, and now 6 (of 0.25%) are priced in.  How central banks choose to tackle inflation will remain the key macro risk for the foreseeable future.

Oil prices have already doubled since the start of 2021 (Brent & West Texas Intermediate (WTI)).  For inflation to stay at current levels, or move higher, energy prices would need to continue to rise at this pace.  This would certainly keep central banks on their expected tightening paths.  However if the negative impact on growth begins to bite, central banks can slow down or pause their rate hikes.

Portfolio Impact

Our discretionary portfolios and funds are very diversified and direct exposure to Russian assets is tiny (less than .25%).  We are structurally underweight emerging markets, and our bias to quality assets means we are further underweight Russia (i.e. holding lower than the benchmark). 

The broader impact is coming through the global markets reacting to the events.  So far this year, moderate risk portfolios were down roughly 6% this year, with 1-2% coming this week.  Based on the usual path for geopolitical crises, we expect most of the recent decline to recover within the next 3-6 months.


- We can’t predict how far Russia will go in their assault on Ukraine, but they are better resourced than in 2014 (invasion of Crimea) to cope with the resulting financial sanctions.  Our base case is that the west lives with their aggression while Russia live with the sanctions.

- Energy prices will bear the brunt of the reaction, but should not be enough to cause a recession.

- Markets will remain choppy as the news evolves.  But over the next few months, they should settle down and gradually recover.

- We reduced our equity exposure in late 2021.  Not in anticipation of this invasion, but because the risk-reward balance was less attractive than it had been at the start of the year.

- If we do fall into a bear market (price decline of 20% or more), which is very rare outside a recession, we may take the opportunity to increase our equity allocation.

What to do now?

Note that these are generic comments, and not a recommendation for any specific investor.  Please consult your adviser for advice relevant to your circumstances.

1)  If fully invested in a diversified portfolio, there is no need to do anything yet. 

2)  If phasing into a portfolio, our normal trigger for accelerating the process is a 10% market decline, which we have now reached.  Now would be a good time to consider a next step.

3)  If holding cash that is surplus to short term liquidity needs, as identified in a financial plan, now would be a good time to consider an investment decision.

Chart of annual returns & intra year declines

Table of market data

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