How a Russian-Ukraine conflict may affect markets

The invasion of Ukraine by neighbouring Russia will be felt across several markets, from food and energy prices; to global stock markets; to safe haven assets like bonds and gold, and to future changes in interest rates. However much of the effects of the conflict are already priced into markets. The best investment strategy is to keep a disciplined long-term focus and not change your portfolio settings.

What are the possible economic effects?


Ukraine is the world’s third-largest exporter of corn and fourth-largest exporter of wheat, so any interruption to the flow of grain is likely to have a major impact on prices and add further fuel to food inflation. This is at a time when its affordability is a major concern across the globe following the economic damage caused by the COVID-19 pandemic.


Energy markets are likely to be hit if tensions turn into further conflict. Europe relies on Russia for around 35% of its natural gas. There could be a rise in oil prices which could reduce global GDP growth while increasing inflation.


A major risk event usually sees investors rushing back to bonds, which represent the safest assets. However, the Russian invasion of Ukraine risks further pushing up oil prices — and therefore inflation. The bond market is reflecting these opposing forces.

Stock Markets

The conflict adds to a wall of worries for global stock markets, following a rout triggered by concerns over aggressive monetary tightening by central banks anxious to tame surging inflation. The less-forgiving macroeconomic backdrop has pulled major benchmarks off their record highs.

Interest Rates

Sanctions imposed this week against Russia could further push up gas and oil prices, which could push inflation even higher. The US Federal Reserve is expected to raise interest rates seven times this year as it tackles a 40-year high in inflation.

However, the conflict may slow global economic growth, in which case central banks will be cautious about how fast and how far rates rise. The consensus view is that inflationary consequences of the Ukraine crisis are a much greater focus than a negative impact on growth, implying that central banks will not be deterred from their current path of expected rate rises.

Bond yields have not plummeted, which one might expect in a flight to safety, due to the fact oil prices have also lifted, which has heightened already high inflation concerns. It also perhaps reflects that the bond market is already ‘looking through’ the conflict, on the view that it won’t overly disrupt global economic growth or the US Federal Reserve’s intention to raise interest rates next month.

What should we do from an investment perspective?

Given the difficulty in timing market reactions to geopolitical developments, most equity investors should stick to an appropriate long-term investment strategy.  Selling shares or switching to a more conservative investment strategy after a major fall just locks in a loss and trying to time the rebound is very hard such that many only get back in after the market has recovered.

As tensions rise, history shows that investors overestimate the potential negative impact on the market and underestimate the possibility of a positive resolution. In the worst-case scenario that Russia does take Ukraine, as they took Crimea, a lot of the bad news is priced in.

A Russian invasion of Ukraine will, at least in the short term, extend 2022’s volatility in the stock market.

The Bottom Line

Geopolitics rattling markets is nothing new. The good news is that the impact tends to be short-lived, only lasting anywhere from one to three months. Most importantly, history shows that 12 months after events such as our current crisis, the market edges higher. Be that as it may, investors can expect markets to remain on edge for weeks. Sitting tight is often the best course of action.

Riding out a storm in the stock market has been a good strategy over the long term.

Amid the pandemic, rising inflation and the Ukraine crisis there are plenty of headlines to keep investors anxious right now. Unfortunately, the future is unknowable and even if you could predict it, you probably still wouldn’t be able to make much money on those headlines. When the markets go haywire, you really have two options on what to do with your portfolio – do something or do nothing. Trying harder and doing more typically leads to better results in many aspects of your life. Investing doesn’t necessarily work like this. Often times the harder you try and the more you do, the worse your results.


Geopolitical events and stock market reactions (1941 - 2020)



The information presented in this article is a summary of our findings from the Stephan Independent Advisory (SIA) Investment Committee.  The Investment Committee is comprised of Joe Stephan, James Stephan and Dr Steve Garth of Principia Investments.  This information is intended to inform and educate. Information in this presentation is based on our opinion and our understanding and interpretation of current investment markets and the global economy.

No actions or decisions relating to your investments should result using this article as a basis, as further enquiry into your personal circumstances should be explored to ensure any financial decision is appropriate to your circumstances.

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