Many of you would be aware of the conflict between Russia and Ukraine, which leads us to the question ‘What does war mean for markets’?

We would caution altering your investment strategy for medium-to-long term for the prospect of war in Ukraine for several reasons:

  • Wars are unpredictable. When they start, their duration, the economic consequences and who may get involved are all highly uncertain and hence make adjusting portfolios difficult to time.
  • Historically, the impact on markets has been small and usually very short term in duration. During geopolitical events across the last 70 years, the average peak to trough decline is only 7% across equity markets.
  • Markets are usually at their weakest prior to the outbreak of war. This is because the “prospect” of war adds to uncertainty – will they or won’t they? Once conflict begins, equity markets don’t tend to weaken much further and losses are usually recovered within a short time frame. The current position- of the MSCI Global index that measures 23 developed markets shows globally we are 10% of the highs markets made prior to the start of this war (Dec 2021)
  • For reference this index whilst lower than we saw in December 2021 is 65% higher from the Covid 19 lows that were seen in March 2020.
  • Asset managers especially in shares have begun a cyclical rebalancing of the shares they hold. Primarily this has seen a move out of technology-based shares and into more consumer driven companies especially commodity-based investments.
  • Predicting whether the current Russia-Ukraine tensions will escalate further is beyond our expertise. However, given the rise we have already seen in the oil price, gold and weakness in equities, we think markets are already pricing in conflict – if not quite a full-scale war.
  • Diversification as a first hedge against further conflict remains a prudent strategy but refrain from getting overly negative on risk assets. We still think the coming year will be characterised by above trend GDP growth, ongoing easy financial conditions, and further gains for equities as economies push further down the reopening route. However, the pace of gain comparative to last year is likely to slow, which is consistent with what happens in the second year of recovery.
  • Finally, conflict might alter the path of future rate hikes from key central banks if it results in more widespread economic damage (via rising energy prices) or directly via reduced activity. A more dovish interest rate path would be more supportive for growth stocks and markets which have been under valuation pressure in recent months.

We will continue to keep you updated as the situation unfolds.  If you have concerns, please contact your financial adviser or the team at Gallagher.