Russia sent shockwaves around the world a year ago when president Vladimir Putin ordered an invasion of Ukraine. The ‘special military operation’ was supposed to be short-lived, but a year later is has not proved so after Ukraine's solid resistance and support from the West.
The war has had significant and far-reaching consequences for people around the world, although there has been none more so than the devastating loss of life in the region.
Sanctions on Russia caused havoc in the energy market, while the war has also partially caused food prices to climb. Here, Trustnet asks experts to consider all of the ways the Ukraine conflict has impacted markets one year on from when the fighting began.
Inflation
Markets were just beginning to realise the stickiness of inflation when Russia invaded Ukraine last February, according to Ayesha Akbar, multi-asset manager at Fidelity.
Rising inflation figures had widely been called ‘transitory’ when they began to ascend past the 2% target in 2021, but central banks began slowly hiking rates to let out some steam.
The invasion, however, exacerbated rising costs and forced central banks to double down on tightening monetary policy.
What had started off as a small issue was escalated in a short amount of time, creating a very different monetary environment today than markets had adjusted to over the past decade.
Akbar said: “This brought down the final curtain on the era of cheap money and quantitative easing that began in the wake of the financial crisis in 2008. We are now at the beginning of a new regime of higher inflation and higher interest rates.”
In the UK, for example, inflation reached a peak of 11.1% in October and although this has dropped to 10.1% in January, rates are still far ahead of the Bank of England’s 2% target.
Inflation over the past year
Source: Office for National Statistics
Similarly, interest rates in the UK have been brought up to 4%, with additional hikes potentially on the cards at the monetary policy committee’s next meeting.
Guillaume Paillat, multi-asset manager at Aviva, said that while interest rates and inflation were on the rise at the start of last year, they were accelerated significantly by the invasion of Ukraine.
He added: “This [the invasion] resulted in inflation moving from a transitory state to something more permanent, with central banks reluctant to ease monetary conditions despite the brisk pace of interest rate increases over the last year.”
Energy security
Paillat also said that the war highlighted the need for energy security in many countries around the world.
The European Union imported 41.2% of its gas from Russia at the start of last year, putting its supplies in a precarious position when tensions soured in February.
Following the invasion and the ensuing support of Ukraine from the West, gas and energy prices skyrocketed and was a leading cause of spiralling inflation.
The EU weaned itself off Russian gas throughout the year, lowering its dependency on the hostile nation to 12.9% by November, according to the European Commission.
The EU's diversification away from Russian gas
Source: European Commission
Paillat said that this scramble to find alternative sources of gas and energy could hasten governments’ mission to net-zero and clean energy.
“The impact of the shock has been centred in Europe, with energy security to remain a key focus in the near term and likely to speed-up the decarbonisation agenda in the medium term,” he said.
“We often say that Europe builds itself in a crisis, and this one might be no exception, especially with the large fiscal response that has ensued.”
Adnan El-Araby, manager of the Barings Emerging EMEA Opportunities trust, added that the EU’s ability to reduce its reliance of Russian oil meant that “the economic implications have so far not been as bad as feared”.
The prices of oil and natural gas have declined in recent months, which has helped ease inflation, and discussions around clean energy have become more commonplace.
El-Araby said: “The war has focused attention on energy security, leading to an acceleration in the transition to more renewable sources as countries look to secure a sustainable and diversified supply of resources.”
Indeed, James Rutland, European equities manager at Invesco, said that a warm winter offset the worst inflationary forecasts.
He said: “Energy costs have already fallen substantially, with economists revising up their negative economic forecasts accordingly.
“With inflation starting to fall from high levels, we could see the headwind from falling real wage growth turn into a tailwind and therefore a rather better outlook for the consumer alongside the broader economic environment.”
Equity deratings
Today’s tight monetary environment is very different from the era of free cash and low rates that characterised the past decade.
Many businesses have struggled in these new conditions, leading to a mass of deratings, according to Mick Dillon, manager of the Global Leaders Strategy at Brown Advisory.
However, Dillon added that these cheaper equity prices have led to a large number of appealing buying opportunities.
He said: “These dislocations often create opportunities as whole industry groups de-rate. We found numerous opportunities to add high-quality companies into our portfolio over the past year, an environment which we expect to continue into 2023.”
The opportunities that have arisen over the past year have been different from what were attractive to investors in the past, according to Jacob de Tusch-Lec, manager of the global income strategy at Artemis.
Growth-heavy sectors such as technology were the winners of the past decade, but a more challenging monetary environment has made them lose their shine.
De Tusch-Lec said that “unprofitable tech stocks will not carry all before them again” and “investors must seek new areas of capital growth” if they want to outperform in these new conditions.
He noted that banks offer a particularly appealing investment case as their profits tend to rise along with interest rates.
“More dependable returns may be found in parts of the economy that should benefit from permanently higher interest rates and shifting government spending priorities,” de Tusch-Lec said.