The last 24 hours have seen a distressing escalation of events in Ukraine following President Putin's order for Russian forces to invade Ukrainian territory which has culminated in attacks on a variety of sites. Indeed, the media headlines are disturbing and the humanitarian impact shouldn't be dismissed. However, from an investor's perspective considering the emotion is already reflected in the short term market reaction, it's important to focus on the bigger picture.
As we highlighted in our blog last month, we viewed tensions between Ukraine and Russia as a likely catalyst for further market volatility. Unfortunately, this has come to pass. However, when we consider previous geopolitical events (such as 9/11 and the first Gulf War), despite the inevitable abrupt selloff in markets, there tends to be minimal persistent impacts because such events fail to materially alter the underlying economic landscape. While we're not geopolitical analysts, the initial responses suggest we may experience a similar outcome. However, we are wary of the potential impact on global energy and agricultural commodity markets, creating some ongoing risks to consider.
Despite its perceived geopolitical might, the Russian economy (by GDP) is of similar size to Australia at US$1.7 trillion. Of more interest to markets is the global economy's reliance on energy, supplying 10% of world's oil and 20% of its natural gas including a third of Europe's supply. While initial economic sanctions have focussed on Russia's financial sector, real pain will only be felt by hitting its back pocket: the supply of petrodollars.
However, as the developed world is already grappling with an accelerating inflation rate, the last thing politicians want to do is exacerbate the issue by restricting energy supply and driving prices even higher. Despite the initial price spike in energy markets, it's interesting to consider how this may impact economies. On one hand, more costly fuel prices could accelerate inflation further, encouraging central banks to lift interest rates even faster than they currently plan. On the other, higher energy costs also act as a headwind for economic growth, which may reduce the urgency for interest rate increases.
This is a complex world event but it isn't without precedence. The humanitarian outcomes will be concerning but we are not alarmed from an investment perspective. Historically, events like these have consistently represented attractive buying opportunities for long-term investors. We are maintaining a watchful eye on markets and will act, as we always have, prudently and appropriately with your capital.