Russia V. Ukraine
We are writing to provide an update and some perspective related to the emerging conflict between Russia and Ukraine and the impact of this situation on the markets. There will likely be continued market volatility around this geopolitical event over the next few weeks and potentially into the coming months depending on how the conflict evolves.
PMA will be monitoring this situation closely. Predicting how these types of events will unfold is extremely challenging, and asset prices are often affected by a wide variety of factors.
Using history as a guide, the market impact of many past geopolitical events has tended to resolve fairly quickly. Attached is a chart from Vanguard which illustrates this tendency of geopolitical sell-offs to be relatively short lived. Nonetheless, and of course, each situation is different from the next, as is the macroeconomic backdrop under which each unfolds. Should market volatility continue to increase as a result of further escalation of conflict in Ukraine and sanctions against Russia, our Investment Committee will meet to determine whether any action is necessary.
To provide some additional context, though Russia is a significant country in our current world order, it represents a small percentage of the investable equity and fixed income markets. For example, as of the end of January, the United States represented approximately 60% of the global, investable equity market. Russia, on the other hand, comprises less than 0.50% of the global market, and Ukraine represents an even smaller percentage than Russia. Further, because PMA constructed portfolios currently have a strategic underweight to both international and emerging markets countries, the amount of equity exposure in these portfolios to Russia and Ukraine is even less than that of the broad, global market. Though the ultimate impact of this crisis may extend well beyond Russia and Ukraine (for example to the global energy markets), PMA portfolios are fairly insulated from direct exposure to these two countries.
Nevertheless, the dispute between Russia and the Ukraine is evolving rapidly and may be developing into the largest military conflict on European soil since World War II. Russia appears to be launching a full-scale attack on Ukraine, having surrounded it with around 150-200,000 soldiers and striking various locations around the country. Ukraine’s ability to defend itself as of February 24, the date of the preparation of this note, is unclear. The situation does have the potential to be a powder keg, and even if it resolves short of a full-scale war – which appears unlikely — but with Russia having achieved a strategic success, this will set an inauspicious precedent.
The last time we wrote about an unfolding crisis, the beginning of the coronavirus pandemic in March 2020, we counseled against taking precipitous action in your portfolios related to that crisis. We believe the same advice applies now, for all of the reasons set forth above (a similar view may be found here). We will of course continue to monitor this situation carefully and should events indicate that another course of action is warranted, we will notify our clients of this change and will act accordingly.
As always, if you have any questions about the current situation, please do not hesitate to contact your advisor.
