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Ukraine Update


Figure 1: Share of Exports for Russia (2021) and Ukraine (2020). The most significant exports from Russia (blue) in 2021 were crude and refined oil (36.5% of total exports), natural gas (12.7%) and iron/steel products (6.6%). For Ukraine (green), meanwhile, grains and beans account for 34.6% of exports while iron and steel represent 26.0%. Source: Flexport

Russia shocked the world and rattled global markets when it launched a full-scale invasion of Ukraine on February 24, 2022. The human cost of the invasion has been tragic and continues to develop. Reports of the Russian military targeting Ukrainian civilians have spawned a refugee crisis, as millions seek safety outside of the country. In response to Russia’s aggression, the United States and its allies have projected unity through increased humanitarian and military aid to Ukraine, and through tough economic sanctions, including a U.S. ban on Russian energy imports. Given Russia’s dependence on oil exports (see Figure 1), this action will deal a significant blow to Russia’s economy. Other sanctions targeting Russia’s central bank and Russia’s ability to access the dollar have coincided with a massive depreciation of the ruble (Russia’s currency). The collapse of their currency, along with diminished access to the Visa and SWIFT networks (which together account for the majority of global card transactions), has caused ordinary Russians to lose faith in the stability of their banking institutions. Additionally, global companies like Starbucks and Coca-Cola are voluntarily leaving the Russian economy behind, albeit many are using language that reflects a temporary cessation of activity rather than a permanent withdrawal. Afraid of capital flight and the devastating impact it could have, Russia closed the Moscow Stock Exchange on February 28, and equities trading remains halted as of this writing (the longest such event in modern Russian history). Lastly, investment-related institutions from MSCI to BlackRock are making a stand in solidarity with Ukraine. MSCI removed Russian equities from its indices, citing the difficulty to trade Russian equities. BlackRock supported a trading halt for its MSCI Russia ETF (ticker: ERUS). Other Russia-linked vehicles have seen trading halts as well, as the invasion of Ukraine proceeds.


While the humanitarian impacts of the invasion are at the front of our minds, as investors, we must also gauge the impacts on markets. To start, it is important to note that most diversified global portfolios, including those of our clients, generally have low exposure to Russian equities. Vanguard Global Equity Fund, for instance, currently has about 0.08% exposure to the country. Before being removed, the weight of Russia in the MSCI Emerging Markets Index was only 1.5%.


Despite this relatively low direct exposure to Russia, concerns remain regarding the market impacts of the ongoing conflict. For one, Ukraine and Russia are both major commodities suppliers to the world, and disruptions in Ukraine and bans of energy imports from Russia will contribute to an already-high inflationary environment. These pressures may force the Federal Reserve to revise its thinking on the timing and size of future Fed Funds Rate hikes necessary to combat inflation. In addition, market volatility has been significant in the near-term. The trading halts and depreciation of the ruble have investors worried about their exposure to Russia for economic reasons, as well as not wanting to support the invaders. On March 7, 2022, major U.S. indices fell – the Dow Jones Industrial Average entered correction territory, having fallen more than 10% from its high, and the tech-heavy Nasdaq entered bear market territory, with the index falling more than 20% from its record high in November 2021. The S&P 500 was down more than 12% year-to-date through March 8, despite the energy sector returning an astonishing 42%, according to Kiplinger. An ETF tracking an index of developed markets outside the U.S. (EFA) was down 14.3% for 2022 as of the same date. Europe has been especially hit, as seen from the iShares Core MSCI Europe ETF’s (IEUR) return of -16.8%. While the outcome is still unknown, the sharp decline of global markets may indicate that investors are pricing in a prolonged conflict. Should a resolution occur more quickly than expected, markets could rally, and we’d expect volatility to lessen. Either way, there are investment allocation implications to bear in mind now and in the future.

European equities have relatively low valuations compared to the S&P 500. If the conflict is short-lived, we could see a rally in European equities as low valuations and increased clarity give investors confidence. If the conflict is prolonged, we expect European equities to remain under pressure, given their dependence on foreign sources of oil, gas, and other products. We believe there are benefits to maintaining a diversified global portfolio with exposure to less expensive stocks relative to the S&P 500 in either case. Portfolios with exposure to U.S. private markets may also benefit from lower volatility, lower relative valuations, and the predominantly domestic consumption of the private company consumer base (which is more insulated from the conflict).


The building inflationary pressure from the Russian invasion, combined with supply chain disruptions and an already inflationary environment, contributes to a negative outlook for bonds. The Federal Reserve is signaling rate hikes over the course of the next year and the risk is that the Federal Reserve may increase rates more than the market is currently pricing in due to inflationary factors. Coupled with the reduced diversification benefits of bonds in this environment, investors with already low bond allocations should maintain or reduce fixed income allocations. If allocations to fixed income must remain moderate to high, investors should consider reducing their duration, or interest rate sensitivity, if their investment policy allows for it.


This conflict also brings in mind a certain policy concept – it is better to have insurance before you need it. At Mangham Associates, we believe that this also applies to asset allocation. Having a diversified, balanced portfolio with exposure to assets with different return drivers can provide peace of mind in a tumultuous world. For example, one of the asset classes we encourage clients to have in their investment policies is real assets. Real assets can provide varying degrees of inflation protection; however, there is a trade-off between the performance of certain real assets during non-inflationary periods and their level of inflation sensitivity (e.g. commodities have high inflation sensitivity and generally perform poorly during non-inflationary periods). The key is finding the right balance that works for your portfolio.


The people of Ukraine are in our thoughts and prayers as we all must remember the human costs of the conflict. The effects of this invasion go far beyond any sanction or investment, but to the very people living it. As always, we welcome your questions and conversation – please reach out to us anytime you would like to chat.


Best Regards,


Tyler Griffin and the Mangham Associates Team



About the Author. Tyler Griffin is a Vice President at Mangham Associates with over five years of investment experience. Prior to joining Mangham in 2016, Tyler worked at a mortgage company and freelanced as a writer. Tyler graduated summa cum laude and was inducted into Phi Beta Kappa. He enjoys volunteering and earned the Virginia Sons of the America Revolution Graves Preservation medal in 2021. Tyler is a CFA Charterholder and a Chartered Alternative Investment Analyst (CAIA) Charterholder. Tyler earned his B.S. in Business Administration from the University of Mary Washington.


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