War in Ukraine: What does it mean for financial markets?

28. Februar 2022

These are dark days for the people of Ukraine. The risk of war across Europe, however remote, has risen – a chilling thought for us all.

This is a fast-moving crisis with enormous uncertainties. Our job is to protect the investments of our clients and, recognising the risks, come up with a calm assessment of the prospects for financial markets.

International sanctions make Russia increasingly reliant on China
Putin’s plans have not gone well. Over the weekend, the west showed considerable resolve and unity in imposing sanctions on Russia, which is now facing a serious financial crisis. The role of China is crucial, as their insatiable appetite for raw materials and energy is a key support for Russia. Russia has also moved a large portion of their foreign exchange reserves into the Chinese currency and switched their payment systems to Chinese banks. China may hold the key to Russia’s ability to sustain the conflict.

Europe will be most affected by the crisis, not least due to its dependence on Russian gas.
Europe, via its geography and energy dependence is much more exposed than the US and the rest of the world to the effects of the crisis. Oil is readily transported but gas is not. Europe receives its gas from Russia via a pipeline that runs through Ukraine and does not have enough LNG terminals to handle alternative supplies. Other financial and economic links have fallen since Russia’s annexation of Crimea but energy remains the key weakness. Will gas supplies to Europe be cut?

Russia may be able to find new outlets for its exports, notably to China, limiting the impact on global supply shortages. But Ukraine’s production is obviously set to collapse. Commodities where Ukraine has a major market share, including some industrial gases, fertilisers and some agricultural products could see shortages.

Putin may have lost control of events, but he still determines how long the war lasts
Putting all this together, supplies in key markets were already short, inflation pressures strong. The global economy has been showing a strong bounce back from Omicron-induced weakness over the winter. And I think growth will continue to firm, even after some downgrades. I do not expect a recession in developed economies. There is a pattern to similar such crises in the past – Iraq’s invasion of Kuwait is perhaps the closest parallel – where financial market weakness has been a buying opportunity. For US and perhaps emerging market equities, I can see the case. I’m rather more hesitant about continental European equities. They have underperformed but may have further to fall. All in all, this is not a time for aggressive moves in portfolios and a more defensive stance is prudent. But we remain cautiously pro-risk. And I do believe that this is the right approach.


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