Geopolitical tensions between the Ukraine and Russia have been bubbling to the surface for some time, but they took a meaningful turn over the past few days with Russia embarking on an invasion of its neighbour that is broader in scope than expected. First and foremost, our thoughts and prayers are with any of our clients, family, friends, and colleagues who may be impacted one way or another by developments in the region. While we have a responsibility to focus on the investment implications of such a crisis, it’s important to recognize the human toll these conflicts can have.

 

Global financial markets have responded in a somewhat expected and orderly fashion in recent days. Volatility has increased and global equities have sold off. Government bonds have modestly risen, while the U.S. dollar and commodities like gold have benefitted from a general flight to safety.

 

From a Canadian perspective, bond markets are behaving as expected, although the gains have been limited. The Canadian equity market on the other hand has, not surprisingly, sold off. However, it has been arguably more resilient than others through recent days, which continues a trend that we have witnessed year-to-date. This can be attributed to the Canadian market’s sizeable exposure to commodities, and in particular energy, precious metals, industrial metals, and agriculture. These areas were already benefitting to some extent from tight global supply and an inflationary backdrop. The geopolitical developments now add to these inflationary concerns given both Russia and the Ukraine are large players on the global stage with respect to commodity production. Meanwhile, the loonie has sold off, but we attribute that to a general flight towards the U.S. dollar, regarded as the world’s safest currency, rather than it reflecting any concern pertaining to Canada.

 

Our firm’s global investments team has provided some very thoughtful commentary over the past few weeks that explains the broader geopolitical issues that have been at play for some time between Russia, the United States, and the North Atlantic Treaty Organization (NATO). Moreover, their work addressed the implications for stronger potential ties between Russia and China. The team also produced an updated reflection on the invasion of Ukraine that is now underway and the implications for the investment outlook. We believe both of these updates are worthwhile reads. Spheres of influence: The bigger reason geopolitical risks are affecting markets (rbcinsight.com)

Russia/Ukraine: Darkness Falls (rbcinsight.com)

 

We are likely to remain in a period of elevated volatility and markets may remain vulnerable in the near-term as developments in Europe unfold. But, history has taught us that military conflicts tend to have a market impact that is limited in magnitude and time. As a result, we are unlikely to shift around portfolio allocations in a meaningful way. However, we remain vigilant, flexible, and willing to take action should the need arise.

 

Should you have any questions, please feel free to reach out.

 

Mike