Ukraine war has investors grappling with geopolitics

By Mark Burgess | March 2, 2022 | Last updated on November 9, 2023
2 min read
Map of Ukraine
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Russia’s invasion of Ukraine has bumped geopolitics to the top of many investors’ worry lists, but experts are maintaining mostly positive outlooks while adding some downside risk.

BMO Capital Markets chief investment officer Brian Belski said the market is for the most part comfortable with geopolitical events, which don’t usually affect stocks for long.

“Now is not the time to make a binary decision and sell,” he said Wednesday on a panel with BMO colleagues.

The U.S. market has already corrected this year. Since 1970, there have been 29 corrections of 10% or more, Belski said, and only seven went into full bear markets with a 20% drop. The average return following those 10% corrections is 27% over the next 12 months.

“I think there’s a lot of solace to be had there,” he said.

In a research note on Tuesday, Invesco chief global market strategist Kristina Hooper said market performance has varied significantly during previous conflicts. While the Yom Kippur war of 1973 ushered in soaring oil prices, inflation and a recession, the 2003 U.S. invasion of Iraq saw stocks continue to recover from the dot-com bust.

“This time, energy prices are rising, which presents a threat to household budgets and business profits (except for the energy sector),” Hooper wrote.

The Ukraine conflict could amount to a 0.5% to 1% global GDP hit this year, she said: “enough to accentuate the ongoing deceleration but not enough to cause recession (except for in those countries in the immediate vicinity).”

The conflict also presents a dilemma for central banks fighting inflation while worrying about economic growth and consumer confidence.

The Bank of Canada went ahead with a 25-basis-point hike on Wednesday, and Hooper said Fed funds futures are still suggesting there could be six rate hikes this year in the U.S. However, a 50-basis-point hike this month is no longer expected.

“If financial markets remain volatile (and bearing in mind the risk of consequences for the financial system from the sanctions on Russia), the Fed may choose to hold rates at its March policy meeting as it waits for more clarity on the implications,” Hooper said, adding that this is “unlikely, but possible as an extreme measure.”

Earl Davis, BMO Global Asset Management’s head of fixed income, said his team’s still looking for opportunities to buy risk assets as they’re repriced for higher rates.

“The time we start reversing that and hedging our exposures is if the Ukrainian crisis goes beyond Ukrainian borders from a hot war perspective,” he said Wednesday on the BMO panel.

Belski said his team will be focusing on cyclical and value stocks over the next 12 to 18 months, with overweight positions in financials, industrials, materials and consumer discretionary sectors in the U.S. and Canada.

But over three to five years, Belski said his favourite sectors are technology, communications services and consumer discretionary.

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Mark Burgess

Mark was the managing editor of Advisor.ca from 2017 to 2024.