A Market-Orientated Look at Two Tragic Years in Ukraine

This coming Saturday marks two years since Vladimir Putin’s troops marched into Ukraine, beginning a gruelling, brutal war of attrition that has raged since. At the time, most commentators we follow projected it to be a quick decapitation of the Ukrainian government that ended with the installation of a pro-Russian puppet regime, or something similar. But those expectations promptly proved false, as Russia’s invasion encountered stiff resistance and bogged down. As that reality emerged, publications we follow launched into speculation about a prolonged war’s impact: As Western sanctions escalated, so did their estimations of the global economic damage. Two years on, those predictions haven’t borne out, which we think provides a timely and timeless reminder about how localised conflict typically affects stocks.

In the first month or so after the war began, conventional wisdom we observed said the pain would be global and brutal. Amongst the claims we saw: Ukraine’s role as one of the world’s bread baskets meant grain shortages in the developing world and higher food prices for all.^[i] Its and Russia’s roles in the production of several fertilisers and metals used in semiconductor production would hit both global agricultural production and tech-related manufacturing.^[ii] Sanctions on Russian oil would take a major source of global crude off the market, bringing permanently higher oil prices—even record-high prices—the world over.^[iii] We saw similar chatter soon spread to natural gas, with talk of shortages in Europe that would lead to rationing, hammering German heavy industry in particular, creating a big drag on global gross domestic product (GDP, a government-produced measure of economic output).^[iv] If the weight of sky-high oil prices didn’t send the world into recession (a period of contracting economic output), commentators we follow warned a European industrial depression surely would.

In our view, markets priced all of these fears in short order. Oil, food and natural gas prices spiked in the invasion’s immediate aftermath, and the global stock market decline that began at January 2022’s start when measured in US dollars gathered steam.^[v] Spiking commodity prices collided with post-pandemic supply chain disruptions and the lockdown-era spike in money supply to send inflation to 40-year highs, further hitting sentiment.^[vi] We think these factors, mixed with widespread chatter around US Federal Reserve (Fed) rate hikes and a host of other items, contributed to 2022’s bear market in dollars.^[vii]

But most of the original warnings didn’t materialise. Instead, stocks bottomed in June 2022 and began pricing in the better-than-expected results.^[viii] Brent crude oil’s peak in dollars turned out to be 9 March 2022, with a brief retest that June.^[ix] But it mostly fell for the next year and is now well below pre-invasion levels.^[x] European gas prices had a much wilder ride and later peak since their supply concerns came later, but their spike, too, was short-lived as nations quickly found new, non-Russian supply sources.^[xi] Rationing never happened, and prices are now down to summer 2021 levels.^[xii] Which is about -90% below August 2022’s short-lived high.^[xiii]

We don’t think this means there was no impact—or that the impact is somehow yet to be seen. Germany continues flirting with recession, partly due to the war’s earlier elevating of gas prices and partly, perhaps moreso, due to its connections to China’s weak economy.^[xiv] But our research shows semiconductor producers have had few problems getting the metals and noble gases needed for production, which continues apace. As for food, grain and broader food prices are all well below pre-invasion levels, and the world isn’t in famine.^[xv]

None of this is news to stocks, in our view, which completed their round trip from bear to bull market in USD and are hitting new highs in dollars, euros and pounds.^[xvi] We think this point is telling. Whilst war raged in Ukraine, stocks shifted cycles. Even though it took some time to manifest in the data and human consciousness, we think stocks were able to see that the war’s global effects were temporary, with the direct economic impact much more limited than feared. Those in the war’s theatre or even on the edges of it have suffered, some in an immensely tragic fashion. For them, the path to recovery once the fighting ends will be long. But it seems to us markets took the cold-hearted, rational view and saw that in the vast majority of the world, it would be business as usual. Sanctions would re-route global trade of oil, gas and other commodities but wouldn’t take Russian supply off the market.^[xvii] GDP growth would continue in most of the world, and the war wouldn’t drain publicly traded companies’ earnings.^[xviii]

Keep this in mind as chatter about Russia, Putin and the war returns to the fore, with talk of a Moldovan invasion simmering amongst commentators we follow once again. Our research shows local conflict can hit sentiment, sometimes hard, especially in the run-up. Rising uncertainty can do that. But we find uncertainty eventually falls as markets assess the conflict’s limited scope and the overwhelming likelihood that the global economy will be fine, and stocks move on.