How quickly do stock markets recover from war?
14:48, 28 February 2022
With fighting between Ukraine and Russia showing no end in sight, markets have reacted with high levels of volatility.
Most of the reaction is based on the uncertainty over any peaceful resolutions and, of course, the market reaction to sanctions imposed by the European Union and members of the North Atlantic Treaty Organization (NATO) on companies and oligarchs with Russian ties or origins.
So, for investors concerned about their portfolios and pension investments, is there any positivity among the gloom? Do stock markets recover from war? If so, how quickly does this happen?
The quick bounce
The short answer to all these questions is: stock markets can bounce back quite quickly. We’ve already seen evidence of this.
“Despite war continuing to rage in Ukraine, the FTSE 100 managed decent gains on Friday as investors make slightly queasy calculations about the extent to which the economic and market impact of Russia’s invasion will be contained,” said AJ Bell investment director Russ Mould last week. Even companies in the firing line because of their Russian ties or origins have experienced some positive bounce back.
Mould points out: “Results from Russian steel producer Evraz (EVRgb) provided an indication of the tricky spot firms with links to Russia are in – with the company just barely acknowledging the conflict, or ‘geo-political situation’ as it euphemistically dubs it, in a statement so thinly worded as to be meaningless.
“However, after some extremely heavy selling in recent days its shares and those of other firms in the firing line like gold miner Polymetal International bounced back.
“Metals markets are surging, lifting the mining sector as a whole, and wheat prices are at a 13-year high – reflecting the fact that both ‘breadbasket of Europe’ Ukraine and Russia are major producers of the crop.”
What is your sentiment on US500?
Very little Russian exposure
Research conducted by investment platform Bestinvest looked at around 25 geopolitical crises, starting with the 1962 Cuban missile crisis. It found, on average, losses on the US S&P 500 were erased within a month and often turned into significant gains after six months.
This data suggests that, more often than not, there’s often no need for panic or knee jerk changes to portfolios.
“Of course, every crisis is different but there are a few things to bear in mind today. Firstly, very few UK retail investors will have direct exposure to Russian or Ukrainian equities which have been massively hit.
“Russian shares were only 2.85% of the MSCI Emerging Market Index at the end of January. They will be a lot less now, having halved this week.
“The bigger impact for most of us will be on near term sentiment in the markets, but also on higher energy prices and whether this might make the current inflation surge worse,” points out Jason Hollands, managing director of investing platform Bestinvest.
Should you make portfolio changes?
The ongoing volatility may still make you nervous. However, changing your investment portfolio in a knee-jerk response to the escalating crisis and violence is risky. Hollands describes such an action as akin to ‘trying to change an aircraft engine in mid-flight’.
For now, knock on repercussions for London listed companies, for example, have been largely limited. “Overall, it’s been so far a pretty sanguine reaction, especially given the dangerous rhetoric from President [Vladimir] Putin could be seen as a market mark of approval for the tougher action taken against Russia. But more investors are seeking safer havens with gold, 0.7% higher, around $1,901 an ounce,” says Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
Even if investments were to suddenly dip drastically, it’s often best to hold your nerve. Hollands points out: “The worst days for markets are often followed by some of the best days, so it is often the case that private investors can be caught short when making switches while prices are lurching all over the place.”
Instead of reacting swiftly to any nasty dips, analysts are recommending that investors use this time to evaluate whether they have a diversified portfolio that include risky as well as defensive stocks.
Defensive positions investments in healthcare and the pharmaceutical industry could be made but this should ideally supplement what you already own, especially if you don’t already have exposure to these industries.
Focus on long term goals
Streeter adds: “The shock of conflict is devastating, but history does point to relatively short-lived volatility on financial markets. Investors should try to look beyond these events and focus on their long-term goals.
“Daily market moves are concerning but trying to transact in periods such as these invariably leads to over-trading and capitalising losses.
“Investors should not panic but take the time to ensure that they have a diversified portfolio with a basket of assets spread across different sectors and geographies.”