Inflation-induced market volatility has been center stage over recent months until geopolitics quickly became the top story with Russia’s invasion of Ukraine. We are by no means foreign policy experts; we do not wish to diminish the humanitarian crisis developing in Eastern Europe, but as financial planners we need to consider investment risks, and even opportunities that develop from geopolitical events.
From an economic standpoint, Russia’s invasion will likely continue to put upward pressure on inflation, most notably on commodities.
We have already seen oil trade above $100 per barrel for the first time since 2014 when Russia annexed Crimea from Ukraine. Depending on how Russian sanctions from NATO countries play out, we could see supply issues due to Russia’s standing as a net oil exporter. Latest estimates show Russia produces about 10% of the world’s oil supply. From an energy standpoint, Russia is the European Union’s most important trading partner. Russia supplies Europe with about 25% of their oil imports and, depending on the year, 20-30% of their liquified natural gas imports.
Along with energy, Russia is an important exporter of metals and grains. They produce 35% of the world’s palladium supply, 10% of platinum, 6% of aluminum, 5% of nickel, and 4% of crude steel. While some of these seem low, commodity supplies are currently tight; therefore, any disruption can significantly impact markets worldwide. Another factor affecting some commodities is that energy is needed to produce some metals, meaning a double impact to price if energy prices stay elevated. Russia and Ukraine combine to supply the world with a large portion of grain supplies, prompting the rise in prices for those commodities.
These events will likely impact Europe most directly in terms of rising prices and supply issues, but the rest of the world will not be immune. Markets will most likely continue to fluctuate to a greater degree than normal. From a portfolio context, remember volatility presents an opportunity. Although the catalyst for this volatile period was a horrific geopolitical event, market corrections, defined by a 10% index decline from a recent high, are normal events that every investor will experience multiple times throughout their lifetime. Even when brought on by a geopolitical event, the S&P 500 Index has traded higher one year after a geopolitical crisis 80% of the time, historically. While this is a difficult time and uncertainty is an overriding theme, avoiding emotional over-reactions to portfolio allocations is the best course of action. Markets will recover, and patience will pay off.
Author: Joe Clark, CFA | Research Team | Allegheny Financial Group | February 2022
The information included herein was obtained from sources which we believe reliable. This report is being provided for informational purposes only. It does not represent any specific investment and is not intended to be an offer of sale of any kind. Past performance is not a guarantee of future results.
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