The main impacts the Russian invasion will have on the U.S. equity markets.
February 2022 - The Russian invasion of Ukraine last week has increased uncertainty in the markets and thus pushed stocks lower. The situation is very fluid, and the ultimate outcome is far from known. We expect many twists and turns on the way to a resolution and we believe it will likely take some time to resolve. There are three main impacts to the U.S. stock market: geopolitical uncertainty increasing volatility, direct effects on companies that sell to Russia and Ukraine, and the secondary effects of potential sanctions against Russia.
The stock market does not like uncertainty and therefore, this has been the biggest impact from the invasion. While this event dominates the news, we believe the market will ultimately become comfortable with the situation and the news flow will have less of an impact, similar to how COVID initially caused a substantial decline in the market, but the most recent Omicron wave had a negligible impact despite cases being much higher. The stock market has a history of moving past geopolitical shocks within a relatively short period of time.
Russia’s economy is relatively small, about the size of Spain, and Ukraine is even smaller. They are not large purchasers of U.S. companies' good and services and thus we believe the impact will be small for some companies and nonexistent for most. We examined potential impacts to our portfolio companies some time ago and determined the effect would be minimal.
We believe the secondary impacts from any sanctions could have a more lasting effect. Russia is a large supplier of commodities, such as oil and gas, wheat, iron, and aluminum. We believe that if these were sanctioned or cut off by Russia, the effect would be felt in nearly every aspect of the U.S. economy. For example, Russia supplies about 5-10% of the U.S. oil. We have already seen a spike in oil prices from $77 per barrel on January 1, 2022, to $100 today, which will have an impact on nearly every company in the form of higher input costs as well as added costs to the consumer. Increased energy costs will likely further fuel inflation and could limit consumer spending. We believe this dynamic will impact large durable purchases most prominently, with minimal impact on lower cost discretionary products and staples.
A broader risk is what these higher costs will do to Europe’s economy, which is much more reliant on Russia for certain commodities. The risk that Europe’s consumer gets further stretched could have an impact on U.S. corporate earnings. The extent of this will likely depend on how long the conflict drags on.
We will continue to monitor consumer spending and the potential for any impact on our portfolio companies as events unfold, however, we are currently comfortable with our positioning in companies with recurring revenue and less exposure to macro and geopolitical issues.
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