CA-EN Institutional
CA-EN Institutional

Russian Drums of War Spark Boxing-Day Stock Sales

We think ongoing market concerns regarding Ukraine and Russia will once again prove to be mainly impacting near-term investor sentiment.
February 2022
February 2022

Geopolitical tensions, especially when involving nuclear superpowers such as Russia, are always scary, but the history of recent decades shows that the impact of local and regional conflicts tends to have limited, short-lived impact on the global economy and financial markets. We think the ongoing market concerns regarding Ukraine and Russia will once again prove to be mainly impacting near-term investor sentiment once fear of a major escalation diminish.

Supporting our more benign market views on Russia’s geopolitical gambit, the Russian economy accounts for only 3% of the global economy (Source: Statistia). For perspective, Italy, which has half of Russia’s population, has an economy twice as large. Meanwhile, Russia’s stock market accounts for just under 3% of the MSCI Emerging Market Index (EM), and not even 1% of the MSCI Global Equity Index (ACWI) (Source: iShares). For a typical balanced fund that owns no more than 10% of Emerging Markets (EM) equities, that translates into a less than 0.3% of direct exposure to Russian equities, whereas Ukraine equities are virtually inexistent in global portfolios. Russian debt, as part of EM bond holdings, can represent a slightly larger allocation, especially for fixed-income heavy portfolios, but this would also typically be less than 0.3% for most fund solutions.

With such a small economic and financial weight, the main impact for investors is therefore more about the risk of global contagion spillovers. Perhaps far more importantly in our view, the biggest impact from the ongoing war turmoil is on investor sentiment, which has been poor in recent weeks despite the upbeat earnings season and economic data releases.

While Russia’s invasion of Ukraine was surprising and the end of game of President Putin remains difficult to predict, we don’t expect the conflict to spill beyond Ukraine for the time being as Russia raises the stakes on political negotiations with NATO countries. Finally, we don’t think China, a close and influential political ally of Russia, would endorse an economically disrupting military escalation in the region as China is seeking to jump-start its reeling economy after a challenging 2021. Anything that could negatively impact global economic activity would be detrimental to China’s reflation effort.

Europe: Most negatively exposed to lingering tensions

Whether it’s from economic sanctions targeting Russia or surging energy and other commodity prices, which will hurt consumers, we think Europe will bear a much larger brunt of the economic costs from the ongoing tensions between Ukraine and Russia. The two main channels where Europe is more exposed to Russia are energy and banking. Russian energy supplies to Europe are critical as Russia accounts for 40% of natural gas supplies (Source: The Guardian) and about 25% of its oil imports. With skyrocketing energy prices and more fragile energy supply network, Europe is already facing a harsher energy market. The other key channel is the banking sector as European financial institutions have closer ties to Russian entities. Therefore European equities suffered the most following the invasion, most notably European banks, which fell 17% between February 10th and 24th (Source: BMO GAM, Bloomberg SX7E Index Performance).

Canada: Well positioned for robust U.S. outlook and rising oil prices

For Canada, $100 oil is good news (except when filling up at the gas tank) for both the economy and the TSX and largely explains why Canadian equities have outperformed most regional equity markets year-to-date. Our portfolios are benefiting from rising oil prices because of our tactical overweights to Canadian equities and to the U.S. oil sector. Because the outlook for the U.S. economy remains robust, albeit cooling, the outlook of North American equities remains less uncertain than what we see in other regions where growth headwinds have proved more persistent than expected.

Equity Outlook and Portfolio Positioning: Earnings Outlook Remains Well Supported by Above-Trend Growth Outlook

Year-to-date S&P 500 performance has been disappointing, but because it’s been entirely driven by a falling forward price-to-earnings (P/E) ratio, cheapening from 22.7 to 19.0 at the time of writing, a 19% drop for the P/E ratio, we think the negative reaction to equities is exaggerated. Meanwhile, earnings-per-share (EPS) have continued to grow in recent months, and we expect them to grow by at least high-single digits in 2022. Finally, because interest rates should continue drifting higher, the twelve-to-eighteen-month outlook for equities remains far more attractive than bonds.

For long-term investors, such geopolitical and market turmoil, while highly unpleasant, is part of the journey of investing. Despite the disheartening humanitarian impact being inflicted on local populations, we don’t think investors should be overly concerned and alter their investment outlook based on recent developments.

Because we think investor sentiment is excessively pessimistic regarding the geopolitical and economic outlook, we stand ready to buy equities on further dips over coming weeks. Although we expect investor sentiment to remain hesitant to bounce back on lack of near-term peace developments, we think we are nearing a bottom for sentiment. We expect anxiety over Ukraine to eventually diminish against a U.S. economy that’s running at full employment.


The viewpoints expressed by the Portfolio Manager represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.