One year after Russia invaded Ukraine, the war remains an ongoing human tragedy. The United Nations Office for the Coordination of Humanitarian Affairs estimates that 17.7 million people have been directly affected since the war started.
While people in the US are far removed from the suffering in Ukraine, they have been affected as well. The war and resulting sanctions have contributed to ongoing high prices for US consumers while benefiting US investors who own energy stocks and commodities. Less obviously, but perhaps more significantly, the war is also a signal to US investors that the world is changing—and the long-term trend toward investor-friendly globalization is changing too.
That was then, this is now
In the 30 years between the collapse of the Soviet Union and the invasion of Ukraine, the US led the world in economic and military power. It used that power to manage international institutions and relations among countries in ways that benefited US investors and US-based multinational companies.
The policies the US supported—sometimes called the Washington Consensus—kept inflation low and helped US companies grow their earnings by cutting costs and expanding into new markets, which in turn helped raise their stock prices. As geopolitical risk analyst Marko Papic puts it in his book Geopolitical Alpha, “It was a great time to be an investor. Geopolitics and politics were on autopilot and running a business or portfolio became routine.”
To be sure, while the Russian invasion of Ukraine may symbolize the end of this period of peaceful prosperity, that end began long before the first Russian tank rolled into Ukraine. Ever since the 2008 global financial crisis, people in many western countries have been demanding that their leaders oppose globalization to protect local jobs and ways of life. More recently, COVID and trade tensions have forced the West to reconsider whether China should be the world’s sole manufacturer of many of the products that western consumers rely on.
What's next for Ukraine?
As the war in Ukraine enters its second year, no end is in sight. Instead, it increasingly resembles an indirect conflict between Russia with the increasing support of China and the US and Europe who increasingly arm and fund the Ukrainian government.
China and the West are able to resupply their respective proxies with weapons and strategic support on an ongoing basis. If they choose to continue doing so, the war in Ukraine is likely to continue longer than many people might expect and the circumstances under which it might end are uncertain.
What is certain is that the conflict is prompting many countries (even those like Japan and Sweden who have long eschewed military spending) to arm themselves and increase their participation in strategic alliances such as NATO in Europe and the US-Japan Mutual Security Treaty in Asia. This rearming and the expansion of national security concerns to include potential cyber and space-based conflicts suggests that the long period of peaceful, US-led globalization has given way to what political scientists call a multi-polar world in which various countries compete for global influence in ways that are not always peaceful. In such an environment, a longer and perhaps wider conflict in Ukraine is not unthinkable.
What is to be done
What all of this means to an individual investor or consumer in the US may not be obvious. After all, your 401(k) can’t help end the war in Ukraine or de-escalate tensions between the West and China. However, those types of geopolitical risks may affect how much your 401(k) can help you when you retire.
Financial markets have become highly globalized over the past 30 years and even familiar US-listed companies likely rely on their operations outside the US for a significant chunk of their earnings. In this new world of disorder, geopolitical risks are taking their place alongside other, more familiar types of risks that professional investors need to understand and consider when making decisions about the funds or individual assets they manage and that you invest in. But while geopolitical and policy risks are becoming an unavoidable fact of life for investors, it is possible to spot them—and to manage them.
Fidelity’s Asset Allocation Research Team (AART) analyzes political and policy risks as well as economic factors including interest rates, inflation, employment, and more. Their research shows that geopolitical crises have historically had significant impacts on financial markets if they also have sustained impact on major economies. While neither Russia nor Ukraine are among the world's biggest economies, both are major exporters of energy, food, and other natural resources. That means the conflict remains a potential source of inflation and slower growth in the bigger economies that rely on commodity imports from Ukraine and Russia.
AART's Dirk Hofschire says the most important thing for investors to consider about any geopolitical event is whether it has consequences for companies, economies, and financial markets. “Horrible things happen in the world all the time as they have throughout history, but few of them have long-term impacts on markets. The Russian invasion of Ukraine was a big deal because it's a sign that we've clearly transitioned into a different type of geopolitical environment in terms of the stability of the world order than we've been accustomed to when the US was the dominant power. Investors shouldn’t obsess over every geopolitical event that happens; they now just need to consider the events as part of the landscape, like they would inflation risk, interest rate risk, or regulatory risk. Geopolitics probably didn't need to be a big part of the toolkit during the past few decades, but that period was very unique to world history. Now it’s probably over and we're going to need to pay more attention to it,” he says.
A more positive consequence of the globalization of finance and commerce is that geopolitical events in one part of the world can now also create potential opportunities elsewhere that may not be easy to spot without rigorous research. For example, Russia is the source of nearly 50% of the energy consumed in Europe and the war and policy responses from the US and EU have disrupted its oil and gas exports. This has predictably caused inflation in Europe, but it has also created an opportunity for companies that operate oil and gas tankers. These companies’ stocks have been some of the best performers over the past year as their ships seek to meet the global demand for energy shipments that would previously have moved through pipelines in Russia and Ukraine.
What it means for you
News of political turmoil and armed conflict abroad can cause even the most resolute investor to question the wisdom of staying invested and diversified. But in a world where markets and risks are global in nature, there is no way—or need—to turn your back on the unique risks or opportunities the world beyond the US offers. Even the set-and-forget target date funds that you might use to save for retirement or college tuition have contained allocations to international stocks.
That’s because despite increasing political and policy risks, the Asset Allocation Research Team estimates that international stocks will outperform US stocks over the next 20 years. Indeed, they expect even mature, developed markets such as the European Union to outperform the US, as they have so far in 2023.
Diversification and professional management can help manage the nerves that accompany short-term risks while you pursue long-term rewards. Or as Fidelity’s Senior Geopolitical Advisor David Bridges puts it, "My view, as the old geopolitical guy, is to take the long view. Just stay focused and don't be afraid."
How to help the people of Ukraine
While images of warfare and volatile markets can be unnerving for investors, it's important to remember that the situation in Ukraine is part of a worldwide humanitarian crisis of displacement. Relief agency World Relief was founded after World War II to help displaced people in Europe and is one of many groups working with Ukraine refugees. They point out that the refugees are part of a worldwide crisis in which more than 100 million people worldwide have been displaced by war and other forms of political violence, a number that grows by more than 37,000 people each day. Here are some more ways to help- people displaced by war.