Russia-Ukraine tension is real but market impact could be small

An impending series of interest rate increases and the deterioration in relations between Russia and the West over Ukraine have worried investors in recent weeks, hence the volatility in US equities in particular.
Russia-Ukraine tension is real but market impact could be small

Experts believe the threat of armed conflict between Ukraine and Russia and the impending shift in US monetary policy are combining in a negative way for investors, at least in the short term. 

Ben Laidler, eToro

Concerns regarding the tension between Russia and Ukraine have led to investors trying to offload risk. However, this should not be overdone as history has shown that geopolitical threats [of crises] have had more impact on the global market than the crises themselves, according to Ben Laidler, global markets strategist at eToro, an Israeli social trading and multi-asset brokerage company.

“Crises in the past, such as the 1990 Gulf War or 9/11 (see chart below), have seen riskier assets like equities recover quickly after weakening. Riskier assets have even been able to outperform safer assets in some cases like the 2014 Crimea invasion,” Laidler added.

Olivier d’Assier, head of applied research, APAC at Qontigo, a financial intelligence provider, backed this view

Olivier d’Assier, Qontigo

“In the background are geopolitical worries, with Ukraine being the nearest. Armed conflicts, especially ones taking place far away from US soil, usually do not have a lasting impact on markets as they are seldom negative for earnings overall across the whole market, so we do not expect a lasting impact from a possible limited invasion of eastern Ukraine by Russia. This is more likely to become a mid-term issue in US politics,” d’Assier said.


At the same time, the market is expecting the US and most developed countries to raise interest rates in 2022 because of soaring inflation. David Chao, global market strategist, Asia Pacific (ex-Japan) at Invesco, an asset manager, thinks their impact, particularly in America, will be good for markets and inflation. 

"A further hawkish tilt of its policy stance by the Fed will ultimately be positive for markets, because it should help bring inflation down gradually during 2022-23, helping keep inflation expectations anchored and limiting the rise in long bond yields," he noted in his latest commentary.

Other specialists believe short-term volatility is on the way. 

“Short-term volatility (3-month time horizon) could be higher than before, partly due to the Fed’s move and continuous supply chain disruption caused by the situation in America’s West Coast ports, which will continue to have an impact on the consumer price index (CPI),” according to Cosmo Zhang, senior research analyst at Vontobel, an investment management firm.

The Federal Reserve said on January 26, following a meeting of its governors, that it is likely to hike interest rates in March. All three major US stock market indices prolonged the already negative sentiment by falling the day before the meeting.


"At least three rate hikes in 2022 have already been priced into the US market and the danger for investors now is if no rate hikes come. This would only happen if the pandemic suffered another wave because of a new variant, threatening the global economic recovery and requiring monetary support," d’Assier added, who sees more potential in value stocks this year. 

“Broadly speaking, 2020 was the year of 'Go-Big-Or-Go-Home', but 2021 was the year of 'Go-Low-And-Stay-Home'. Risk-Off strategies outperformed Risk-On ones since the February 2021 inflation tantrum, and renewed inflation worries in Q4 gave Risk-Off another boost,” he told AsianInvestor.

The inflation tantrum got its name from the aftermath of an announcement by then Federal Reserve chair on May 22, 2013 that the Fed would start tapering asset purchases at some future date. This sent a negative shock to the market, causing bond investors to start selling. As a result, the yield on 10-year US Treasuries rose from around 2% in May 2013 to around 3% in December. This sharp climb in yields is often referred to as the “taper tantrum”.

“Value will continue to outperform growth, low volatility and low beta stocks will continue to outperform high volatility and high beta stocks. Quality companies with strong earnings and low debt will continue to outperform speculative companies with no earnings and large debts. Large cap stocks with their diversified earnings source will continue to outperform small cap stocks with their focused and narrow earnings streams,” he said.

Risk-on situations describe how investors with a high risk appetite bid up asset prices in the market, while in risk-off situations, investors become more risk-averse and sell assets, sending their prices lower.


Investor sentiment remains bearish in all developed markets and Asia ex-Japan. It has recovered only slightly in global emerging markets, Japan, and China, but has stayed negative there too, according to Qontigo's latest survey as of January 25 (see table below).

If interest rates have their expected downward impact on inflation and geopolitical tensions do not deteriorate, the negative view among investors could change quickly.

"The sharpness of the declines has a feeling of hysteria: hysteria about inflation, hysteria about higher interest rates, hysteria about Ukraine. But all hysteria does is sustain itself until it eventually exhausts itself. The history of the Risk-On-Risk-Off (ROOF) scores confirms that moments of extremes — either hysteria or euphoria — are just that: moments; and do not usually have lasting power," he noted in the survey. 

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