A conflict such as the one between Russia and Ukraine makes the entire financial world vulnerable. It is often difficult to put into perspective the little importance of an investment portfolio in such uncertain times, but as an investor, it’s important to consider the additional risks that such an event might bring.
It is natural to be curious about how the Russia-Ukraine crisis could potentially impact your investment portfolio. And, you’re not alone many investors I speak to are worried about the vulnerable times and just want an impact it has had on the economy. Many investors are wondering how this geopolitical event could shake up the markets, especially for those who hold stocks and bonds not just with countries that have close ties to the countries, but markets across the entire world.
So how is investing going to impact different markets?
First things first, let’s talk about how the crisis is impacting emerging markets. As you may know, many emerging market economies are closely tied to commodity prices and the crisis has certainly caused disruptions in this area. Countries that are commodity producers, such as Australia, Canada, Latin America, and South Africa, may stand to benefit from higher commodity prices as a result of the loss of Russian supply to global markets. On the other hand, countries that have close economic ties to Russia, such as Belarus and Kazakhstan, may suffer as a result of Russia’s economic troubles.
Now, how does this all relate to your investment portfolio? Well, if you have holdings in companies that are tied to the commodities market or have operations in emerging markets, you may see some positive impact on your portfolio. However, if you have holdings in companies that do a significant amount of business in Russia or have large numbers of expatriate workers in the country, you may see a negative impact.
Another potential concern for investors is the potential for a broader contagion effect, as investors become more risk-averse and withdraw their investments from emerging markets. This could lead to a sharp decline in emerging market currencies, a rise in interest rates, and a decrease in economic growth. This is particularly true for countries that are heavily dependent on foreign investment, such as Turkey and South Africa. If your portfolio has holdings in companies in these countries, you may see a negative impact. In university, I took many international finance classes that spoke about contagion, the stories through history are ones not for the faint-hearted, quickly what seems like a key event for one country, or a small group of countries can quickly spread into many markets.
Let’s think about what contagion is, in simple terms, it is the spread of a financial or economic crisis from one country or market to other countries or markets. Classic examples have been the Asian Crisis in the late 1990s, the Russian Financial crisis at a similar period and the 2008 financial crisis which quickly spread into different countries. Specifically, it occurs when a crisis in one country or market leads to a decline in the value of assets in other countries or markets, even if those countries or markets are not directly affected by the crisis. This can happen through a variety of channels, such as trade linkages, financial linkages, or a general increase in risk aversion among investors. Contagion can lead to a broader economic downturn, as countries and markets that were not initially affected by the crisis are dragged down by the actions of other countries or markets.
Now let’s think about the companies in the US and UK.
Additionally, if you have holdings in US or UK companies that do a significant amount of business in Russia or Ukraine, the crisis could negatively impact their revenue. Also, if the crisis escalates and results in a significant disruption of global trade routes, it could lead to a decline in global demand for goods and services, which would negatively impact the stock market in the US and UK and your portfolio may be affected.
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