Russia’s unexpected invasion of Ukraine has sent shockwaves through markets around the world.
Risk assets such as stocks and cryptocurrencies have tumbled, while traditional safe-haven assets like gold and precious metals have gone up.
Meanwhile, oil as well as other key commodities have spiked at a time when inflation in the U.S. and the E.U. is already running hot.
While predicting the consequences of this conflict is notoriously difficult, analysts fear it could come at a significant cost, not only for Russia and Ukraine but also for the global economy.
So what could be the best course of action for you as an investor and, most importantly, what can you do right now to protect your savings and investment portfolio?
Take a look at a brief overview of the conflict and a few practical tips for precious metals investors.
Russia-Ukraine conflict: What happened exactly?
A conflict that could evolve into Europe’s biggest since World War II.
It all started with the Russian state deploying over 150,000 troops within striking range of Ukraine, with its rhetoric growing more and more belligerent as time passed.
Russian President Vladimir Putin demanded legal guarantees that Ukraine would never join NATO or host the organization’s missile strike systems, concessions he was unlikely to get.
And despite a flurry of diplomatic efforts, Putin did little to ease the tensions:
- On February 22, Putin delivered a dramatic televised speech followed by Russia recognizing the sovereignty of its two proxy states in eastern Ukraine.
- And then, in the early hours of February 24, Putin addressed his nation once again, announcing a “special military operation” against Ukraine, tipping this long diplomatic standoff into a full-blown war.
Fighting is now taking place on the entire territory of Ukraine, including in the capital city of Kyiv, with Russian troops targeting Ukraine’s strategic military infrastructure and military positions.
And as the crisis unfolds, analysts think that increased volatility is likely to dominate the markets in Europe and the U.S.
Russia-Ukraine conflict: what are the risks for investors?
Broadly speaking, economists see consequences that could range from relatively limited to extremely serious.
But the main idea is this: “It is a time of red alerts, and not just the weather. Red alert for markets, for Ukraine, for energy prices and supplies, for inflation, and for supply chains”, says Brian Dennehy, financial analyst at FundExpert.
So let’s look at each of these issues:
Even higher inflation in Europe could send energy prices up
First, increased geopolitical tensions could make inflation, already at a 40-year-high, even worse.
For example, a worst-case scenario could send oil prices to $120 - $140 a barrel, according to Capital Economics, an independent economic research consultancy.
With Russia being Europe’s main gas supplier and Ukraine its main supply route, tensions could also push Europe’s natural gas prices higher, potentially adding 2 percentage points to inflation in advanced economies.
And as energy prices continue to go up, they could easily push the global economy into its second recession in three years.
More disruptions in the supply chain
The Russian invasion of Ukraine could also potentially increase certain industry-specific risks, and global supply chain disruption.
With the global auto industry being the most likely candidate and striking example.
"Russia is the world's largest exporter of palladium, so there is the potential for more auto supply-chain disruptions given that palladium is used in catalytic converters,” says Kristina Hooper, Invesco's chief global market strategist.
Even before this conflict erupted, the global auto industry had been grappling with some significant chip shortages. Shortages that have reportedly cost the industry as much as $210 billion in revenue in 2021 alone.
And now the ongoing geopolitical tensions are on track to make the situation even more complicated.
Weakening consumer sentiment and slower growth
Naturally, surging prices and continued supply chain chaos are likely to accelerate an already weakening consumer sentiment that could, in turn, result in slower economic growth.
“Depending on how long this crisis continues, there could be a significant loss of confidence among businesses and consumers,” Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said.
That’s why, according to some analysts, it will be crucial to stay vigilant, to spend less and save more, if the conflict goes on.
Ian Shepherdson, Chief Economist at Pantheon Macroeconomics, adds that slower growth is inevitable: “Consumer sentiment everywhere will weaken further... That has to mean slower economic growth than would otherwise have been expected in Europe, the US, and most emerging markets,” he stressed.
Now we’ve seen some of the most likely consequences of the Russia-Ukraine crisis, it’s time to think of ways to protect your money and investments.
How to protect your investment portfolio?
While you clearly shouldn’t panic and make hasty changes to your portfolio, there are some steps you could take now to protect your wealth in the event of the above-mentioned scenarios.
Step #1: Gut check your risk tolerance
This literally means considering taking less risk with your investments.
With all the market volatility, now might not be the best time to place a larger chunk of your portfolio in high-flying stocks like, for example, Apple or Netflix. At least that’s what market analysts say:
"Whether there will be a full-blown war or not, the simple strategy is to bet on a spike in inflation. That means buying oil and agricultural products, and shorting consumer shares and U.S. growth stocks,” said Yuan Yuwei, a Chinese hedge fund manager at Water Wisdom Asset Management.
(FYI, growth stocks simply are companies expected to grow their sales and earnings at a faster pace than the market average. For example, Amazon.com Inc., Meta, Apple Inc., Netflix, etc.)
But then again, some economists warn that buying basic commodities could be equally risky, as some prices, such as oil, can become very volatile with a conflict involving Russia, which could potentially lead to big losses.
Overall, as most major stocks went on a roller-coaster ride as the Russia-Ukraine conflict intensified, economists say investors should accept such levels of market volatility for the months to come.
Step #2: Make sure you’re well-diversified
We’re almost sure you know all the benefits of portfolio diversification: spreading your money across different assets and industries, and even across different countries and regions, will help reduce your risk of losses. And this is even more true in a volatile market, where losses can be even less predictable.
And with the stock market entering a high-volatility territory, some investors are already considering pulling their money out of the market to place it in more stable assets like cash or precious metals.
But while some financial analysts may agree with keeping some of your portfolio in cash in theory, they warn against making any such rushed move:
“50% in cash sounds great in theory. But once you pull out of the market, you have to make the very hard decision of timing when to go back in. Most investors will lose money doing that,” Adrian Lowcock, an independent fund expert, says.
And not only that. Don’t forget that there’s also rising inflation that will most likely eat away at a large chunk of your cash savings in no time.
That’s why, in such situations, buying historical safe-haven assets such as gold and precious metals can be a good choice if you want to protect your wealth and diversify your portfolio.
Gold has been steadily rising for the last few months as a response to growing inflation fears worldwide. And right after Russia’s invasion of Ukraine, the gold price soared to a one-year high of $1,970 an ounce, which shows that the precious metal really acts as a hedge in times of geopolitical turmoil.
According to UBS analyst Giovanni Staunovo, “a protracted escalation could see gold rising to or above $2,000 per ounce in the short-term,” which means that the safe-haven demand for gold is high.
So make sure the option you choose is one that works for you and your investment goals, and choose a reliable hedge against most of the risks we see appearing from the current Russia-Ukraine conflict.
No one knows how the Ukraine war will evolve, and we do hope it de-escalates as quickly and peacefully as possible.
But when it comes to its impact on the economy, looking at the wider global response will be crucial, according to economists, and China’s reaction will be especially important to follow.
Beijing has already expressed its readiness to help Russia deal with the financial consequences of its military involvement in Ukraine.
And some fear that shockwaves from Ukraine could also reach Taiwan, with which China has an increasingly tense relationship, thus dealing yet another blow to global markets.
So will markets be able to withstand this new geopolitical shock?
Analysts see a possibility that they could fall further, with some serious consequences for corporate and household wealth.
For now, we can’t do much more than wait and see how the situation unfolds.
But as far as your investments go, you can at least make sure your savings and investment portfolios are fully protected.