Chief Investment Officer | Johnson Financial Group
As Chief Investment Officer, Brian Andrew leads Johnson Financial Group's investment strategy to provide consistent, actionable investment solutions for our clients.
4 minute read time
As I write this morning, pundits, diplomats and politicians around the world are trying to decide whether the Russian move into the Donbas region of Ukraine constitutes an invasion and, regardless of the terminology, what should be done about it.
Most of Europe and the U.S. have agreed that some form of sanctions would be levied against Russia and its leader, Vladimir Putin, should an invasion take place. Because this isn’t a foreign affairs journal, we’ll stick to potential impact on markets and our portfolios due to this recent development.
Russia has been amassing troops on three sides of Ukraine for months. It has also been working inside the Donbas region of eastern Ukraine at least since 2014 aiding separatists. What’s new is that Russia has moved forces into this area more formally as “peacekeepers.” This allows Russian soldiers to wear their own uniforms and operate more in the open. The question now is whether or not this becomes another Crimea, chipping away at the size of Ukraine or a full-scale invasion of the country. Russia is interested in protecting its western border; Putin would like to recover states lost to the break-up of the USSR; and NATO allies would like to add another country at Russia’s door.
Because asset prices, such as those of stocks and bonds, may be impacted by many things besides the fundamentals for a company, the potential for war in Eastern Europe has roiled markets.
There is a direct impact to prices for things like oil and gas. And an indirect impact on things like stocks and bonds due to the uncertainty a war creates. Still, as we’ve noted times, asset prices will reflect their underlying value over long periods of time. Meaning that a stock’s price will reflect the value of future earnings, and a bond’s price will reflect the quality of a company’s balance sheet and income statement along with the likelihood of getting paid interest and seeing your principal returned.
Markets have been trying to handicap the potential for war for some time now. As a result, the initial market impact may be muted.
Prices for oil and natural gas will be more directly impacted than those for stocks and bonds. Western European nations get about 40% of their energy from Russia.
Energy prices have already become elevated ahead of today’s news due to the waning pandemic economic restart. Oil in the Brent Sea is trading above $97 per barrel whereas it traded nearer $70 at the beginning of December.
Tuesday morning, British Prime Minister, Boris Johnson, announced sanctions against four Russian banks and several oligarchs’ personal assets. This action, coupled with likely sanctions from additional countries, will exacerbate the supply of energy and could push prices up further near-term. In the U.S., higher prices have shale oil producers ramping up production again, though it will take time for greater supply to offset price increases. Middle East oil producers will also continue adding production. Still higher prices add about $3 billion per day to Russia’s coffers for exports so financing their activities just got easier.
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