Russia-Ukraine Update: Escalating Conflict Has Market and Portfolio Impacts
Military Moves Trigger Swift Diplomatic Response
Russian President Vladimir Putin ordered a full-scale invasion of Ukraine on the morning of February 24, massively escalating the long-running conflict. For context, Russia occupied Crimea (part of Ukraine) and has supported breakaway republics in Ukraine since 2014. In contrast, this appears to be a full-scale invasion targeting regime change in Russia’s southern neighbor.
The U.S. and EU are expected to respond with increasingly severe economic sanctions against Russia and members of its ruling elite. This follows sanctions enacted earlier in the month, which included Germany stopping approval of the Nord Stream 2 pipeline. The gas pipeline from Russia to Germany would have increased European reliance on Russian energy exports.
We’ve shared our perspective with you as events have taken shape during this fast-moving situation, and we’ll continue to do so as it evolves. You can read our February 1 article, “Russia-Ukraine Standoff: Our Take on Potential Market Effects,” for additional context.
Global markets reacted negatively to the invasion, and stocks declined sharply across all major regions. Oil prices, which had risen in recent weeks, climbed higher.
Investment Response: Underweight Russia in All Emerging Markets Portfolios
Given the full-scale invasion of Ukraine—coupled with expectations of severe sanctions from the U.S. and Europe—we are underweight Russia across all American Century Investments’ emerging markets portfolios.
We expect the U.S. and Europe to confirm additional sanctions in the coming days. Sanctions will likely focus on export controls and the financial sector. Russia may be denied access to high-tech goods and critical technology. Restrictions on the major Russian banks may severely impact their international operations and limit Russia’s access to capital. Further targeted sanctions on individuals close to the government are likely.
The situation remains tense, and Russia’s risk premium remains elevated. Markets are trading in “risk-off” mode today, which will likely continue until the economic impact of the announced sanctions is understood. Further, investors will likely need time to digest the implications for currency and commodity markets, as well as economic growth more broadly.
References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.