Markets around the world reacted seismically on Thursday as Russian forces invaded Ukraine, tipping a long diplomatic standoff into a military conflict.
Global investors are contending not only with uncertainty over the duration and extent of the ensuing conflict, but also by the potential supply shortages, worsening inflation due to surging energy prices, slowing economic growth and the"Heightened volatility on the escalation of the conflict shows markets had not fully priced in the likelihood of deeper conflict," said Mark Haefele, chief investment officer at USB Global Wealth Management.
"We expect continued volatility in the near term as leaders calibrate and announce their response to this escalation." UBS noted that Russia has a strong commercial interest in continuing to sell its energy and commodity exports into Europe, with the EU accounting for 36.5% of all Russian imports and 37.9% of exports in 2020. The Swiss lender's strategists suggested that the weight of this trade relationship could mitigate the risk of a long-lasting military engagement.
However, UBS offered investors five action points for investors to navigate the current period of uncertainty: keep a diversified portfolio, use commodities as a geopolitical hedge, position for U.S. dollar strength, buy the winners from global growth, and build up some defense. Goldman Sachs analysts noted on Thursday that the crisis had pushed the Federal Reserve's risk index to a very high level, though direct effects on the U.S. economy will be limited relative to Europe, which is more susceptible to trade disruptions, higher energy prices and tighter financial conditions.
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