War in Ukraine Makes Investors Think of a Second Cold War

Since the fall of the Soviet Union, investors have enjoyed decades of global economic stability, with foreign military and diplomatic conflicts playing an diminished role in market movements.

But Russia’s invasion of Ukraine It is the most visible sign of the recent change in that dynamic where the growing competition between powerful nations will have dire consequences for investors.

Europe’s largest military conflict since World War II – along with escalating tensions between the United States and China – has investors watching shifts in international power dynamics more closely than they have for a long time.

Daniel J. said: A fund manager overseeing $2.2 trillion in assets. “This situation in Russia further complicates some of these broad global relationships, and it is certainly a growing topic of conversation with our investors.”

Financial markets have always been sensitive to geopolitical events – elections, supply disruptions and trade tensions – that can move prices. And in just a few days, the invasion of Ukraine triggered a series of economic maneuvers that could rapidly change the way countries raise money, buy raw materials and with whom they deal.

The United States and its European allies said they would Freezing any assets of the Russian Central Bank held by US financial institutions, making it difficult for the central bank to support the ruble. new penalties for her Basically blocked Some Russian banks of international transactions. British oil giant BP said it would do so “Exit” Its 20 percent stake in Russia’s state-controlled oil company Rosneft, which was valued at $14 billion last year. And the Norway’s Sovereign Wealth Fundthe world’s largest company, said it would divest itself of its Russian investments.

These moves – along with Russia’s position as the world’s third largest oil producer, after the United States and Saudi Arabia – have shaken markets around the world. Commodity traders are discovering how to redirect the global flow of oil, natural gas, minerals and grains. Stock traders, already faced with uncertainty as governments and central banks grapple with the fallout from the pandemic, must contend with an armed conflict that could impede any business that relies on those materials.

The S&P 500 fell for a second straight month in February, including rapid volatility in recent days as the fighting rages and the fallout from financial sanctions. instant effect on the Russian economy. The ruble fell To a record low against the dollar, oil futures rose to more than $100 a barrel.

Jason Schenker, president of Prestige Economics, a forecaster in Austin, Texas, described the revival of tensions between Western countries and Russia as a second Cold War.

“There is this competition for global influence and global power, but the stakes are now high,” said Mr. Schenker. We may have a protracted battle of penalties and soft power diplomacy. And we could see successive risks of further military action.”

That danger was evident on Tuesday when former Russian Prime Minister Dmitry Medvedev warned that economic wars “often turn into real wars,” prompting France’s Finance Minister, Bruno Le Maire, to retract an earlier statement that Europe was “fully prepared.” Economic and financial war against Russia.” Mr. Le Maire said his use of the word ‘war’ was inappropriate.

Although the incursion into Ukraine is a concrete and public example of the way geopolitical events are increasingly affecting markets, a transformation was already underway.

Tensions escalate between the United States and China biggest business partner In goods, for years, most notably the trade war during the administration of President Donald J. Trump, which included Tariffs on a wide range of Chinese products In 2018. But the maneuvers have continued since then: Beijing has moved to rein in companies that… List of their shares in the United States While also giving Wall Street banks more free hand To operate within its borders, which means that investor-managed businesses exist on Chinese terms.

Russia’s attack on Ukraine and moves to isolate it may push Russia Even closer to China, which was more cautious than other countries about the attack. It also led to increased concern about China’s relationship with Taiwan, the autonomous island claimed by Beijing. Although there is no indication that an invasion of the island is imminent, China Regularly send warplanes Toward Taiwan, analysts said Beijing is making clear that it will not rule out military action to absorb the island.

Taiwan plays a critical role in the global supply chain of semiconductor chips that power things as diverse as iPhones and cars, and is an important trading partner with the United States, which Import billions of dollars In the electrical machinery of the island.

Any military action in Taiwan would cause a seismic shift in the global economy, said Karl Chamota, chief market strategist at Corpay, a global payments company, and investors and companies are watching closely the global economic impact of sanctions on Russia as a test case. .

Mr. Chamota, who is based in Toronto, said the sanctions against Russia are similar to old capital controls, indicating a renewed desire by governments to use economic tools to achieve foreign policy goals. This can come as a shock to businesses and merchants who are used to moving hundreds of millions of dollars across borders quickly and easily.

“The sand will be put into the cogs of the global economic machine, on purpose,” he said. “Governments are going to try to slow down the movement of things across borders and the amount of money that can move from one place to another, and that’s a whole different world if you’re a big multinational — it makes business more difficult.”

The fight, in and of itself, has not hampered the growth of financial markets. After the September 11 attacks, for example, the exchange remained closed for four days and reopened to a sharp sell-off. But the effect was temporary, and stock markets went steadily upwards even as the United States launched two wars in Iraq and Afghanistan in the following decades. The most severe outage was a financial crisis, not a military one, in 2008.

After analyzing the performance of the S&P 500 since 1945, UBS’s Global Wealth Management found that markets typically decline during the first week of major military conflicts. But in 14 out of 18 cases, it rose within three months.

“Valuations have gone down, so some of the risks have already been priced in,” Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management, wrote in a note. “We continue to expect global growth above trend as countries lift restrictions related to Covid-19.”

Kristina Huber, chief global market strategist at Invesco, which manages $1.6 trillion for clients including pension funds, insurance companies and individual investors, said the fighting in Ukraine was more worrisome because of the human toll. Small gains are expected for the US stock market this year, but those gains come with increased volatility. Geopolitical considerations add to the already murky conditions facing investors as the Federal Reserve plans to increase interest rates to curb inflation.

“There is a tremendous amount of uncertainty out there,” she said.

In the short term, Mr. Shmotta said, investors will likely continue to buy safe haven assets such as the US dollar or Japanese yen and avoid riskier assets such as stocks as Russian forces continue to pressure Ukraine. Even if a quick and peaceful solution is found, the conflict will have lasting effects, he said.

“In the long run, investors will not forget this episode,” he said. “It’s very clear that the economic war is underway, and as such, I think investors will be more cautious for years to come.”