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Russia’s invasion of Ukraine and the ensuing sanctions imposed on Russia by the West have, understandably, sent jitters through the world. But you wouldn’t say so looking at some of the more popular stock market indices.
In the first few weeks of 2022, the S&P 500, which tracks the top 500 companies in the US, came off its highs of around 4 700 points reached in December, hit a low of 4 225 on February 25, the day after the invasion, and promptly started climbing again. As I write (on March 3, 2022) it’s hovering around 4 400.
The MSCI World Index, which tracks over 1 500 large and mid-cap shares across 23 developed market countries, peaked at 3 248 points in early January, dropped to 2 905 on February 24, and recovered slightly to around 2 930.
The FTSE Index, which tracks the London Stock Exchange, followed a similar pattern. It dipped on February 24, but had recovered by the following day.
Here in South Africa, the JSE All Share Index is hitting record highs of over 77 000 as I write, having dipped on February 24 to about 74 000.
Hardly a panic, judging by the figures. In fact, on the face of it, equity markets seem to have been bolstered by Russia’s actions.
Compare this to the crash two years ago when we entered the pandemic. But although that drop was a precipitous one, the markets recovered remarkably quickly and the rest is history, as they say.
In a recent article for global investment firm Schroders, Duncan Lamont, the firm’s head of research and analytics, shows that heightened fear actually appears to stimulate market performance.
Lamont looked at the Vix index, comparing it with performance of the S&P 500. The Vix is a gauge of investor fear: it measures the amount of volatility traders expect for the S&P 500 during the next 30 days. Up until 2020, it averaged about 20 points. The pandemic caused it to spike at over 80 points, but it settled at a slightly higher level of 30 points. As the pandemic wore on and life started getting back to normal, the Vix slowly subsided, looking as if it would settle at its pre-pandemic lows. The events of February 24, however, sent it shooting back up to 30.
I won’t attempt to answer why Covid-19 gave rise to almost three times as much market panic as Putin’s belligerent actions – I would have thought the threat of world annihilation through nuclear war, a threat humanity has not seriously had to contend with since the Cuban Missile Crisis of 1962, would have spooked investors more than a rampant virus, but then, maybe that’s just me.
To get back to Lamont, he says: “Rather than being a time to sell, historically, periods of heightened fear have been when the brave-hearted have earned the best returns. On average, the S&P 500 generated an average 12-month return of over 15% if the Vix was between 28.7 and 33.5. And more than 26% if it breached 33.5.”
It echoes Warren Buffett’s immortal words that investors should be “greedy when others are fearful and fearful when others are greedy”.
This is not to ignore serious economic challenges that lie ahead if the conflict becomes prolonged and sanctions against Russia become more entrenched. Among other things, we are likely to see heightened fuel prices, which will, in turn, keep inflation high for longer.
Economists at the Bureau for Economic Research (BER) at Stellenbosch University say the crisis, as it stands currently, is unlikely to have a major impact on our imports and exports. In a research note on February 28, BER noted that South Africa’s trade links with Russia are relatively limited, with the country making up less than 0.4% of total merchandise exports in 2021. Last year, we imported goods worth R9.2 billion from Russia, less than 1% (0.7%) of total imports.
“However, some listed companies have more exposure to [Russia], and specific sectors, such as citrus producers and fruit exporters, are more susceptible to downside risk should trade with Russia come under pressure amid the impact of sanctions and/or a likely steep downturn in the Russian economy. South Africa’s trade linkages with Ukraine are very minor,” the BER team said.
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