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The World of Investing Has Changed After the Russia-Ukraine War

Golden Brokers Ltd.

One year has passed since the Russia-Ukraine war outbreak which created waves of market downturns, growth hinders and recovery obstacles, in-turn weakening the performance of the majority of industries and sectors.

Political turmoil exacerbated existing economic challenges faced by nations across the world, giving birth to the intercorrelated market conditions of surging energy prices, high inflation, skewed currency valuations & sharp price movements; sending markets downwards in 2022.

Perhaps oblivion isn’t the appropriate characterization of current market conditions, as recoveries have begun & markets are expected to revitalize in the medium to long term. Here are the four prevalent changes since the war outbreak in detail:

1. Surging Energy Prices

Energy commodities, notably oil and natural gas, have been predominantly constricted since the COVID-19 outbreak, given halted production and nation-wide restrictions, and tight energy supplies have been tightened even further due to the war outbreak. USA and Europe-led sanctions on Russia’s energy resources, hand-in-hand with fresh COVID waves in several regions, have constricted supplies even further which realized a sharp increase in energy prices. The oil industry was the notable winner in this scenario, while other industries and average household capabilities all took a major blow.

2. Sky-high Inflation

Perhaps the most omnipresent impact which the war had on the markets is sky-high inflation which infected many minor and major economies. Some countries sustained decade-long inflationary pressures, while others were victim of up to 40-year consumer price index highs. From consumer goods such as food products to corporate services, the prices of goods and services across the board have risen which negatively impacted households, nations and economic growth. Central banks from around the world, including the U.S. Federal Reserve, have bumped interest rates time & time again to combat red-hot inflation, with previously-dovish central banks such as the European Central Bank (ECB) and the Bank of Japan (BoJ) also following suit of the Fed’s move by adopting a more-hawkish monetary policy stance.

3. Short-lived Rallies

From the investor’s perspective, all market rallies and bullish runs throughout 2022 were short-lived. Investor pessimism and skepticism, paired with high reluctancy to spend & invest, meant that any rallies only lasted for a few weeks at best. When investors gained confidence to invest, more interest rate hikes subsided which sent skepticism to very high levels. Federal Reserve chief Jerome Powell recently stated that the markets may not need any more rate hikes, but after being used to recurrent rate bumps, investors and traders have gone very skeptical. An accurate indication of pessimism would be the VIX fear index, which peaked several times in the past year before dwindling in 2023. In the world of cryptocurrencies, the Bitcoin Fear & Greed Index has been in the fear realm in almost the entirety of 2022, but the current year is heavily on the greed side.

4. Skewed Currency Valuations

Among the major impacts of the geopolitical instability caused by the war would be that the valuations of many major currencies have been skewed beyond expectations. At some point, the U.S. Dollar was more valuable than the Euro; a phenomenon unseen since 2002. Safe-haven assets like the Japanese Yen, Swiss Franc and even the precious gold have arguably lost their characteristic as effective hedges against inflation. Most financial instruments have been victim of slow & painful deterioration, adversely impacting the performance of many industries and sectors.

5. Sharp Price Movements

Investors are on edge; good news would send the value of financial assets, such as stocks, cryptocurrencies and indices higher, and bad news would plummet the markets. Such high volatility is the result of high imbalances between the market bulls & bears. Yet, some financial assets such as value stocks have remained more stable than the majority. Survival of the fittest, or as they say, re-affirmed its meaning in 2022. Major companies have relentlessly cut jobs to cope with higher costs, while others struggled to make ends meet. What's next? Historically, inflations are followed by recessions, before hitting a trough and growing once back. Federal Reserve chairman Jerome Powell has recently re-iterated his belief that further interest rate hikes may not be needed, but markets have been so used to them in the past year to the extent that not all are on board with his statements. Many analysts of renowned financial institutions expect that markets may dwindle further in 2023, but are expected to recover by at least 2024 given market consolidation and diminishing imbalances between supply & demand of raw materials, commodities & financial instruments.

Prepared by team Golden Brokers analysts

Source: https://goldenbrokers.my/en/the-world-of-investing-has-changed-after-the-russia-ukraine-war
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