Russia: Have investment trends changed irreversibly?

It has been six weeks since Russia sent troops to Ukraine, sparking what is perhaps the biggest ground conflict in Europe since Germany declared war on France in 1940.

It has already dramatically changed the world and sent shockwaves through the markets.

As the West has banded together to impose crippling sanctions on the Kremlin elite, corporations have turned away from Russia, causing their economy to haemorrhage.

The decision to ban imports of Russian oil marked a particularly moral turning point in the world of investment, with the US leading the charge with a comprehensive ban and the UK planning to phase out its imports to further condemn investors. actions of Vladimir Putin in Ukraine.

Elsewhere, European equities stumble into correction territory, while energy prices, already up, climb even higher. All of this is of great concern to officials in Whitehall, where the whispers of the dreaded R-word are beginning to cause some unease.

Giles Coghlan is Chief Currency Analyst at HYCM

What happens next on the battlefield is anyone’s guess, and such events barely scratch the surface of the market’s reaction to the conflict so far. In truth, there is no guarantee as to how the conflict will develop or how the financial markets will react.

With that in mind, how has the crisis so far affected investment trends?

How war affects the economy

First, it is important to recognize how war in general tends to impact financial markets.

As serious as the current conflict between Russia and Ukraine is, history tells us that when the flames of war flare up, stock markets tend to ignore it.

Undoubtedly, the human costs of war can be devastating, but the bombing of Syria in 2017, the US withdrawal from Afghanistan and the North Korean missile crisis all provide relevant examples that the market’s reaction to these events can be surprisingly sweet.

Ultimately, most dips end up being bought, so mid-term investors can potentially find good value in bad times.

A look back at World War II (1939-1945) shows that the Dow rose by 50% in total throughout this period, or more than 7% per year.

Similarly, the US stock market rose 115% during two of the worst wars in modern history – such logic dictates that the relationship between geopolitical crises and market outcomes is not as simple as it may seem. it seems.

Assembly of the “war puzzle”

Russia’s attack on Ukraine was largely a surprise (Credit: Ronaldo Schemidt/AFP)

But what about this particular situation? There is certainly something to be said for the fact that expectations of the crisis between Russia and Ukraine were largely dismissed before the conflict broke out.

Prior to the onset of the crisis, British and American intelligence officials multiplied their warnings, but those warnings were largely dismissed by kyiv. In cases like this where the war starts out of surprise, the outbreak of a war can drive down stock prices.