How The Russia-Ukraine War Can Affect Your Investments
This is an article “How The Russia-Ukraine War Can Affect Your Investments” by Marc Primo
No one ever thought that a full-blown war in Europe could erupt in the 20th century without warning, yet Russia did just that with its unprovoked assault on neighboring Ukraine. What's harder to fathom is how this seemingly isolated conflict sent shockwaves across global markets and affected every asset class significantly.
Since the start of the invasion, the Standard and Poor (S&P) 500 index dropped over 10% from its recent peak, and experts quickly braced themselves for a more complicated situation than recent years of the pandemic. From every investor's point of view, the possibility of a worldwide market free fall became much more apparent and ominous.
The immediate blow of unwanted inflation (the highest for the US in four decades) that even other developed nations found challenging has ushered in increases in Treasury debt and gold to mitigate the spikes in oil prices and essential commodities. It’s easy to see that while Russia's invasion of Ukraine is impacting most retail investors, it is considered a first and significant dilemma that needs swift mitigation.
Should investors go on a selling spree now that there is a potential for the global market to crash?
Though tempting, experts strongly advise against it, and here’s why.
What economy experts say
In terms of securing investments, most business pundits will tell you to stay calm and focus on buying low amid a falling market. After all, that's what most successful investors usually do. Given that the effects of the current European conflict on energy prices and monetary policies are still up in the air, chances are stocks can still recover quickly despite the global crisis.
On a broader scale, world markets are all too familiar with multiple geopolitical crises. First comes panic but the dust soon settles within one to three months, provided the necessary adjustments are in place.
Historically, most markets experience a rebound after a year from similar financial turmoils. Global markets are designed to stay resilient, especially during geopolitical challenges. Of course, it's safe to say that the current events will still disrupt Wall Street numbers for the short term, and adjustments are still very much necessary.
One good example is how the US market first dropped by more than 30% since COVID-19 started, then grew twice as much at the beginning of 2022. Globally, the ongoing pandemic and current European conflict both exacerbate reactive measures towards inflation.
However, such economic interference shouldn't push investors to go and sell their stocks just yet. Otherwise, they might suffer far more significant market losses.
The oil quandary
Since the military unrest in Ukraine began, Brent crude oil has reached the $107 per barrel mark. With the increase, gas prices at the pump can also reach at least $4 per gallon, and consumers should brace themselves for rising prices in basic commodities and retail goods.
Even if the mark still doesn't exceed 2014 recession levels since it is below the inflation rate of $120 per barrel, it doesn't mean crude prices can't crash. But thanks to how the country's shale production industry learned its lesson in 2014 when they spent an estimated $500 billion in capital just for crude oil prices to come crashing down, investments in oil can remain continuous and profitable today.
Most publicly listed companies have yet to announce their targets following Russia's attack on Ukraine. Still, many have already said they will stay with the current production or gradually apply increases depending on shareholder returns. Somehow, this is good news for smaller shale producers who can raise their production to alleviate rising oil prices if they can first solve their supply and logistical challenges.
The inevitability of inflation
The inevitability of inflation and its effects on agricultural and petrol commodities continue to raise consumer anxiety. Russia and Ukraine supply 20% of the world's corn and 30% of its wheat as both are agricultural powerhouses.
Still, most economists think that investors can still cushion the current inflationary developments as it will affect the US less than its counterparts in Europe due to its trade networks. For every $10 barrel increase, the country's inflation rises to only about 0.2%. Aside from this, experts have said that the current European conflict will not hinder the Federal Reserve's targeted increase of 0.25-0.5 percentage points starting in March.
Economic bottlenecks brought about by the pandemic and Russia's invasion of Ukraine were most unfortunate for investors. Other commodities that continue to hike their prices include nickel and aluminum futures. Add to this supply and logistical challenges set on by the current conflict and global sanctions on Russia and Belarus, leading more investors to scamper for solutions to reduce risks.
Yet, the best thing that investors can do for now is to keep themselves at an impasse while still buying or holding their index funds. Even if prices continue to rise and the central bank applies its inflationary adjustments, more robust investments will return to the market sooner or later.
The good news
In 2014, when Russia annexed Ukraine's Crimea, oil prices spiked but energy prices remained neutral and did little to affect the US economy. Investors can expect the same with the recent global economic disruptions, and even if gas prices continue to increase, they can explore other means to encourage consumer spending.
Investors who secure emergency cash funds have better chances of weathering the current market volatility as they can access what they need for contingency measures without rattling their stocks until prices settle down. Whether people place their money on small or large scale investments, increasing their savings, settling debts and loans, and staying consistent with their potential investments will keep them afloat.
While retail investors have to deal with the immediate impacts of war, they should also stick to their long-term plans and be on the lookout for more opportunities. If no recession emerges in the global market, waiting out the current European conflict is the best recourse for small and big players.
The chances of the stock market crashing are too far-fetched anyway as publicly-traded entities are still making a profit despite the sudden inflation and consumers are still confident about their purchasing habits. As long as investors don't resort to panic selling and double the risks that the current economic crisis already brings, all they have to do is wait for the economy to bounce back and reap more rewards from their investments once the dust settles.