Russia-Ukraine conflict: Two months on, how are investors responding?

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More than two months on, the conflict between Russia and Ukraine continues to have a marked impact on the world, with the risk of escalation steadily mounting as peace talks falter. While Russia launches fresh military actions in the Donbass region, the EU has implemented the sixth round of sanctions on Moscow – as such, it is likely that the conflict will continue unabated for some time yet. It goes without saying that such actions have radically altered the state of diplomacy on the world’s stage, but how has the economy fared so far?

Admittedly, when the intervention first became apparent on February 24, 2022, the stock markets immediately felt the repercussions. As Russia captured the Zaporizhia nuclear power station in March, the FTSE 100 saw its biggest dip since March 2020, dropping more than 250 points in a single day. Across the pond, the S&P faced similar upheaval, haemorrhaging 13.4% in the year in response. On top of pre-conflict problems in the economy, energy, supply chain and inflation issues have continued to plague retail investors since the crisis began, with the situation worsening as political tensions and government sanctions ramp up.

In light of the above, as the conflict in Ukraine enters its third month, it is a useful exercise to take stock of the investor response to the events, and how the financial markets are reacting as the situation in the region develops.

Investors keen to ‘wait and see’

In short, the conflict has had little bearing on the investment strategies of the vast majority of investors overall. In fact, according to recent research conducted on behalf ofHYCM, just 10% have modified their strategies, whilst only marginally more (14%) admit to monitoring the situation when considering their investments. Indeed, this suggests that most investors have rejected a reactionary, panicked response to the conflict, and perhaps expect its impact on the stock markets to begin to subside.

Is this a wise decision? Other geopolitical crises in recent history would suggest so – the North Korean missile crisis and the bombing of Syria in 2017, for example, both prompted a rather muted response from the global stock markets, so perhaps a ‘wait and see’ approach is best for the medium- to long-term. Looking back even further, the Dow was actually up by 50% between the years of 1939-1945, despite the atrocities of the Second World War. Of course, it would be unwise to draw direct comparisons between these conflicts and the one we are currently facing. That said, to risk making a general statement, it is clear that markets can respond unexpectedly to moments of international conflict.

Investors are sticking to their moral convictions

Another striking development in the investment landscape, and one which has been much reported on over the past two months, is the fact that businesses are taking a moral approach to the conflict. In the weeks and months since the military conflict began, the Yale School of Management estimate that over 750 organisations have chosen to cease to operate in Russia to condemn the conflict. 

Now, it seems like investors are following suit. According to HYCM, 67% of investors believe that consumers and fellow investors are likely to boycott Russia ‘remainers’, with a further 44% also suggesting that they will reconsider their investments that are exposed to countries or firms that support Russia’s military actions in Ukraine. Equally, it appears that investors are taking the current situation seriously, with many prepared to divest from companies that maintain operations in Russia, despite the potential risks to their portfolio. With this in mind, it is no surprise that 69% of investors believe that the crisis has resulted in irreversible changes to international trade ties between Russia and the West.

Perhaps less surprising is the fact that some investors are putting plans in place to mitigate the possibility of negative economic conditions with ‘safe haven’ assets like gold, defensive stocks, currencies and government bonds. Indeed, 37% said they will increase their investments in these areas, with this number soaring to 79% amongst those with the largest portfolios. This suggests that those who have not yet altered their investments are considering hedge options should they need to adjust their strategies as things progress on the ground.

Shifting attitudes in the global energy market

The global energy markets have already been ravaged by the repercussions of COVID-19, extreme weather conditions and supply-chain issues. As the price of coal, natural gas and electricity rises for both consumers and producers, this conflict could not have come at a more difficult time.

In the long-term, however, the majority of investors are taking an optimistic stance. At present, 59% believe the uncertainty in the energy markets caused by the conflict will ultimately drive investment in green metals, nuclear power and ‘cleaner’ energy, propelling the world towards its net-zero targets.

A relatively reassuring outlook for the long-term – but not one that is shared by 50% of investors who believe that net-zero targets will be pushed back by a spate of investments into dirty energy stocks in the short-term. Indeed, Russia’s exit from the energy market has left a deficit that needs filling, and it is currently expected that fossil fuels will see billions of dollars of new investment to rebalance the state of play.

‘ESG’ investments: reconsidering defence stocks

Elsewhere, there is a wider debate about what should be considered a legitimate environmental, social and governance (ESG) investment. In years gone by, banks have been wary of including defence stocks in ESG funds due to their participation in the arms trade, with the European Union even remarking that the sector is"socially harmful".

However, the conflict has somewhat shifted this attitude, with many investors maintaining that greater investment in defence could help supply military equipment to ‘underdog’ nations, allowing them to defend themselves. Sweden’s SEB bank, which was previously opposed to defence stocks, has allowed six of their funds to invest in the defence sector in response to this rethinking of ESG investments. Similarly, 17% of investors are in favour of including defence stocks in ESG investment categories, whilst a quarter (25%) say they will increase their investments in defence if the conflict escalates further. 

As international tensions refuse to subside and the threat of escalation looming, portfolio management alone is unlikely to be at the forefront of investors’ minds. That said, investors would do well to remain composed and cautious when mulling over any significant changes to their strategies.