The Ukraine war: What investors should expect

Russia’s invasion of Ukraine, which began last Feb. 24, has been causing the volatility in the Philippine Stock Exchange index (PSEi).

The crisis is also pushing the Philippine peso to depreciate as funds are shifting to safe haven currencies and assets like the US dollar, Swiss francs and gold.

Commodity prices are also rising since both Russia and Ukraine are large exporters of various commodities including oil, coal, steel and wheat.

Not surprisingly, consumer stocks are among the weakest as they are expected to hurt the most from the likely surge in inflation caused by higher oil and soft commodity prices.

On the other hand, mining stocks are performing strongly, as they are expected to benefit the most from the sharply higher prices of coal, nickel, industrial metals and gold.

However, if history were to be our guide, there is a strong likelihood that the stock market will be trading higher six to 12 months later despite the ongoing volatility, as the significant increase in commodity prices will most likely not be sustained.

Other significant factors

This is based on the performance of both the US S&P (Standard and Poor’s) 500 index and the PSEi during five past geopolitical events, namely the Gulf war of 1990, the 9/11 terrorist attacks in 2001, the Iraq war of 2003, Russia’s invasion of Georgia in 2008 and Russia’s annexation of Crimea in 2014.

Note that the S&P 500 and the PSEi both ended higher three out of five times, six and 12 months after the said events started.

During the two times when both the US and the Philippine markets were down, there were other more significant factors that were responsible for their weak performances.

For example, during the 9/11 terrorist attacks, the United States was in the middle of a bear market with the dotcom bubble having just burst a year earlier. On the other hand, the Philippines was still in the process of recovering from the Asian Financial crisis.

Meanwhile, when Russia invaded Georgia in 2008, the world was in the middle of the global financial crisis. This was the main reason why the US and the Philippine markets were weak.

In fact, if not for the bear markets in 2001 and 2008, the US and Philippine stock markets may have performed better six to 12 months later, after geopolitical tensions escalated.

Reduced uncertainty

The most likely reason why markets rebounded later on was because oil price spikes were not sustained.

Note that during all five geopolitical events that we highlighted, oil prices were lower six months after the event started. As such, inflation became a nonissue, reducing uncertainty for businesses and investors.

Although the Russia-Ukraine crisis is largely responsible for the significant increase in oil and commodity prices recently, if history were to be our guide, commodity prices could also return to more reasonable levels by the second half of this year.

This should address concerns that Russia’s invasion of Ukraine could result in stagflation globally given both countries’ large share to global commodity exports.

Because the market usually trades higher six months and 12 months after geopolitical tensions arise, investors shouldn’t be too worried despite the prevailing market conditions. INQ