Investors have had much to contend with in recent months, with the emergence of the Omicron variant, rising inflation worries and the prospect of higher interest rates. To these concerns, we can now add the Russian invasion of Ukraine which, aside from the likelihood of human suffering, poses geopolitical dangers for the West and threatens to make our inflation problems worse. Clearly, it is a fast-moving situation which could change very quickly. Russia’s military has launched air and missile attacks across Ukraine as well as land incursions in some areas. This followed Vladimir Putin’s formal recognition of the independence of the breakaway republics in Eastern Ukraine and their request for military support.
What does this mean for you and your investments?
Given this turn of events, the most likely scenario now looks likely to be Russian occupation of the Donbass region following a very costly conflict given the scale of Ukrainian military capability to oppose. That will leave Ukraine in a greatly weakened state and unable to seek to join NATO, which would seem to accomplish what Putin has set out to do. It seems unlikely that NATO will take a direct involvement and that leaves the energy prices as the main economic fallout that western economies will see Geopolitical events of this kind have a short term and very unsettling impact on markets. However the lessons of the past are that markets will adjust in a relatively short timeframe once the conflict is contained. The following table shows the length of time that events of this nature have impacted on markets using the S&P 500 as a gauge.
The escalation of the crisis in Ukraine into conflict will hamper markets in the near term and we are experiencing its effect across the asset classes. However once it is contained and doesn’t result in western military engagement its market impact should prove short lived. It may add to the inflationary pressures that the ECB is facing as energy prices could be impacted for longer than had been hoped.
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