Could the Ukraine war spark another market meltdown?

Global markets fell sharply after Russia invaded Ukraine but quickly bounced back. However, the war remains a threat to investors.


When Russia invaded Ukraine in February it triggered a sharp sell-off on stock markets worldwide. The UK’s benchmark FTSE 100 index fell by more than 7% from peak to trough in just under a month, as the West imposed severe economic sanctions on Moscow and commodity prices shot up. 

As of early April, however, the index had recovered to its 2022 highs, which was a pattern seen across stock markets. Other concerns have since begun to weigh on investors’ minds, although measures of expected market volatility remain sharply lower than when the war began, , indicating that investors are less anxious about the crisis. 

Wars and dramatic geopolitical events usually spark an initial sharp sell-off but rarely have a prolonged impact on stock markets. US stockbroker LPL Financial shows that since 1941, the S&P 500 has fallen by an average of 5%, following 20 major geopolitical events that included the attack on Pearl Harbor, the assassination of President John F Kennedy and the September 11 terrorist attacks of 2001. 

In addition, large cap stocks in the US garnered average returns of 16.9% for investors during World War II, 6.4% during the Vietnam War and 11.7% during the 1991 Gulf War, according to research by Mark Armbruster, head of investment firm of Armbruster Capital Management. Typically, the index takes just 43 days to recover.

“It is somewhat understandable that investors often run for the exits in the early stages of a conflict,” says John Simmons, a senior strategist at the investment bank William Blair Investment Management. 

“It is a natural human instinct to choose ‘flight’ over ‘fight’ in matters of a pocketbook or a retirement account. But blind investor panic can be a mistake that is advantageous to longer-term and fundamental investors.”

This is in part because historically conflicts have tended to have a greater regional than global effect on markets, says Richard Dunbar, head of multi-asset research at asset manager abrdn. 

For instance, Russia’s stock exchange has lost about a third of its value due to the impact of the conflict  as the country’s currency has fluctuated, and strict controls have been brought in to prop up the economy. 

By contrast, most big listed companies in the US and UK have not been directly affected by the crisis beyond facing knock-on effects of rising commodity prices or the costs of pulling out of the Russian market. 

The bigger problem facing global investors in cases like Ukraine is uncertainty, says Victoria Scholar, head of investment at the trading platform interactive investor. 

“When signs of conflict emerge, there are a multitude of potential outcomes from a quick resolution at one end of the spectrum to a world war at the other. As a result, the market is attempting to discount all of these possible outcomes with the more pessimistic forecasters understandably selling their investments,” she says.

There are reasons to believe the war could further shake markets, however. 

For one, another sharp sell-off is inevitable if Russia’s aggression spreads beyond the Ukraine borders or Moscow uses nuclear or chemical weapons. For another, the invasion is driving up inflation worldwide at a time when the global economy faces a series of other threats, including slower growth, rising interest rates and a resurgence of Covid cases in China. 

“The biggest threat to markets is most aptly characterised as a confluence of many factors,” says William Blair’s Simmons. “The war in Ukraine in and of itself is somewhere on the list of the threats to markets, but probably not right at the top.”

Even before the war, the cost of living was climbing fast in many countries as pent-up demand from the pandemic pushed up oil and natural gas prices, disrupted supply chains and forced employers to increase wages to counter staff shortages (all costs that were passed on to consumers). But the invasion is now adding to the pain, with the cost of living rising at its fastest rate in 30 years in the UK, raising fears of an economic slowdown

It’s largely due to concerns about Russian oil and gas supplies being disrupted, which has further pushed up global energy and fuel prices. Russia and Ukraine are also major exporters of minerals, energy, fertiliser and foodstuffs, the costs of which have rocketed.

In early April, the International Monetary Fund slashed its forecast for global economic growth in 2022 by nearly a full percentage point to 3.6%, citing the Ukraine war and warning that inflation was a “clear and present danger” for many countries.

The response from central banks has been to raise interest rates. But that increases the cost of borrowing and investing for businesses and must be handled delicately, says Scholar.

“A major economic downturn has the potential to knock markets off course, particularly if central banks are forced to tighten monetary policy while global growth slows.”

Investors are, naturally, cautious about the year ahead. David Jane is a fund manager at Premier Miton. He thinks that “a prolonged conflict – as happened in Afghanistan – is sadly on the cards, which may not bother markets too much as we think they are already expecting as much”. But he believes that sanctions are likely to persist, Europe will need to pay more for its energy and, with Russia demanding roubles or gold as payment for commodities, “other countries are likely to want to demand the same”.

While abrdn doesn’t forecast any recessions in 2022, Dunbar thinks “it doesn’t take a huge leap of imagination to see how a recession might come about”. He adds that while a peace deal between Ukraine and Russia would be welcome for Ukrainians and markets, many of the problems faced by investors were there before the war and would remain after it.

Scholar accepts it’s an uncertain time but warns against knee-jerk reactions. The key, she says, is taking a long-term view and having a diversified portfolio.

“Markets have survived through world wars, the Great Depression, the internet boom and bust and the global financial crisis. And as any seasoned investor will tell you, the markets have bounced back.”