We are seeing more heightened volatility as markets digest the fallout from the Russia and Ukraine conflicts. There have been pullbacks between 8-13% in S&P500 and NASDAQ year to date.
From a purely financial and economic perspective, localized conflicts generally do not have a sustained market impact. S&P500 has usually recovered or posted strong performance within 6months of the conflicts (See Appendix I - equity performance during past conflicts since WWII) and markets in the previous conflicts such as the Crimean crisis and Iraq War have bottomed prior to invasions take place.
Some of the more pronounced impacts are on specific sectors. Russia, while it accounts for approximately 1.7% of global GDP, is a significant exporter of energy and select materials. Overall, the West has limited direct exposure given on going sanctions but continued conflicts can amplify inflation pressure in energy and materials.
In the absence of recession on the horizon, we reiterate a positive stance on stocks over bonds and cash. Since 1945, S&P500 has delivered a 7.3% annualized return, in line with the annualized growth in operating earnings per share. Over the long term, earnings is the most important predictor of market returns.
Since the Financial Crisis, major growth scares have been accompanied by drawdowns of roughly 14-20%. All of these have represented buying opportunities, with strong rebounds averaging 24-30% in the 6-12 months that followed.
S&P 500 Performance with Major Growth Scare Declines
Source: RBC US Equity Strategy, Bloomberg, FactSet, Thomson, as of late February 2022
Environmental Social and Governance - Our hope for a brighter future
What has been overshadowed in the world of geopolitics is the recently published report by IPCC – the Intergovernmental Panel and Climate Change. The report highlighted a closing widow to secure a liveable and sustainable future for everyone.
We have witnessed increasingly extreme weather events throughout the recent years. Climate change will continue to cause dislocation of people, refugee crises and heightened geopolitical tensions. It will be the most pressing issue for us in every aspect.
In RBC’s 2022 ESG conference, we have highlighted the importance of ESG as core to business strategies for leaders in their respective industries; the importance of public and private partnerships in accelerating ESG integration and the importance of turning climate commitments into actions, both at the policy level and the corporate level.
I will continue to update you on the progress in ESG integration and their implications on investment decision making.
Appendix 1 -Equity performance during past conflicts since WWII
Source: Bloomberg, JPMorgan
Rita Li works with individuals and business owners and healthcare professionals to provide tailored investment advice, risk management and financial planning. Her team comprises of professionals with in-depth taxation, insurance and legal expertise, together, they deliver a high standard of service to clients. Rita is a Chartered Financial Analyst CFA® and holds her MBA from Richard Ivey School of Business.