Geopolitical tensions between the Ukraine and Russia took a foreboding turn over the past few days, with Russia executing a broad-based invasion of its neighbour. Our thoughts and prayers are with the Ukrainian people, and with any of our clients, family, friends and colleagues who are impacted by developments in the region. While we have a responsibility to focus on the investment implications of such a crisis, it is important to recognize the great human toll that these conflicts inevitably inflict.
Global financial markets have responded in an expected 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 benefited from a general flight to safety.
Canadian bond markets have behaved as expected, although the gains have been limited. In contrast, the Canadian equity market has, not surprisingly, sold off, but Canadian equities have been more resilient than those in U.S. and European markets. This phenomenon can be attributed to the Canadian market’s sizable exposure to commodities, and in particular energy, precious metals, industrial metals and agriculture. These sectors were already benefiting from tight global supply and an inflationary backdrop. The geopolitical developments in the Ukraine, including trade sanctions and prohibitions, now add to these inflationary concerns, given that both Russia and the Ukraine are large commodity producers. Despite the strength of commodity prices and the relative out-performance of Canadian stocks, the Canadian dollar has weakened as a consequence of investors’ flight to safety in the U.S. dollar, regarded as the world’s most secure currency.
Our firm’s global investments team has provided thoughtful commentary over the past few weeks that explains the broader geopolitical issues at play between Russia, the United States and the North Atlantic Treaty Organization (NATO). The team’s work addressed the implications for stronger ties between Russia and China. The team also produced an updated reflection on the invasion of Ukraine and its implications for the investment outlook. Both of these updates are attached below.
Financial markets are likely to remain in a period of elevated volatility, and markets may remain vulnerable in the near-term as developments in Europe unfold. History has taught us, however, that military conflicts tend to have an impact on financial markets that is limited in both magnitude and duration. As a result, we recommend staying the course. Nevertheless, we remain vigilant, flexible and willing to take action should the need arise.
If you have any questions, please feel free to contact us.