Once warnings of an imminent Russian invasion of Ukraine circulated, stock markets took a hit. And as events unfolded and the invasion started, it’s safe to say that markets went into freefall. Bonds, gold, commodities all fell, and with good reason. This invasion triggered the worst security crisis in Europe in decades.
A week on and although there is a huge amount of uncertainty, one thing is clear. The immediate economic consequences of the invasion are likely to be significant. Both the war and the sanctions that follow will create huge uncertainty, alter trade flows, impact supply chains and create massive volatility in financial markets.
The crisis in Ukraine will hamper the markets in the short term and possibly also in the medium term. The effects are being felt across asset classes including ESG strategies.
Impact on investments
There are two noticeably clear immediate impacts of the invasion. The first is the cost of energy and this then gives rise to concerns over inflation. The EU imports a substantial proportion of both its natural gas and crude oil from Russia, and these supplies will become pressurised. This pressure will be driven by sanctions, which are being tightened on a daily basis, and with the uncertainty around them starting to be reflected in the elevated oil and natural gas prices.
It is highly likely that the supply of energy will be reduced with a corresponding impact on price. The price of energy and agricultural commodities is where those of us in Ireland and the rest of Europe will see the most impact of the invasion.
What happens next?
However, historical data may help towards relieving the concerns that many investors have at this time. While stock markets do react to headlines, it has been shown that they tend to recover quickly and take geopolitical events in their stride. In fact, according to recent LPL research, looking at 22 past instances, on average, it took less than 20 days for markets to bottom and 43 days to recover all losses.
But while market prices quickly incorporate the impact of these events on our economies and companies, there may be longer term effects to consider. This is in particular, when considering the international dependence on Russia’s fossil fuels.
An opportunity for ESG
My belief is that this will bring a more medium-term focus on renewables. It is possible to see how the cohort of those currently largely dependent on Russian fossil fuels may now be more motivated to pursue energy independent. I can see a situation where there will be a greater diversification of our energy supply. This will involve a shift to renewable energy. For those invested in or interested in options in the ESG space, this is certainly something to watch over the coming months.
In the meantime, while we wait for markets to stabilise, it is worth remembering the basics of investing. For many people, risk is mitigated through a combination of diversification and medium to long term investment.
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