Are geopolitical crises investable?
The ongoing crisis in Ukraine is top of mind for some investors and we have seen back and forth headlines surrounding the possibility of a Russian invasion on Ukraine. So how should we position our portfolio accordingly?
Understand what is at risk and learn from history
Firstly we take a look at the context where things are happening. The global indices have minute exposure to Russia and none to Ukraine. Russia only makes up 0.4% of the global stock market measured by the MSCI AC World Index.
If history is any guide, the US stock market reacts with little or no measurable impact for an investor who is reasonably diversified during past incidents involving Russia. Most recently in 2014, the annexation of Crimea from Ukraine saw the S&P 500 dip less than 2% on the day it happened and rebound at least partially within a week. Zooming out in perspective, such incidents are just a small blip on the charts.
Sanctions to Russia will also not have much of an impact on the U.S. which is mainly agricultural. If anything, it would be the energy or commodities prices which would already have been baked in by now.
What’s the bottom line?
Simply put, events are only as important as how much they can affect the fundamentals of the stocks that we are invested in. Always ask yourself if any event is going to affect the investment thesis of the company that you believe in. If you are invested in. For example ask yourself how will this event eventually impact the earnings of your stock holdings, say Apple, Amazon, Nike or Netflix? It doesn’t take an analyst or number crunching exercise to derive answers to such questions.
The majority of the S&P 500 companies overall have little revenue exposure to Russia and Ukraine. The combined revenue exposure of the S&P 500 to Russia and Ukraine is about 1%. Even for the top 10 companies in the S&P 500 that have the highest combined revenue exposure to Russia and Ukraine, their exposure are not particularly worrying. (with the exception for Philip Morris)
In the short term some panic selling is to be expected from jittery investors reading doom and gloom news. But we are of the opinion that well-diversified investors focused on the U.S. markets do not need to take much action to protect their portfolios from the geopolitical tensions tied to the current potential invasion in Ukraine.
Co-Founder of The Joyful Investors and Manager of The Moneyball Portfolio. I graduated with a degree in Economics in National University of Singapore (NUS). My previous experience with traders at the Merrill Lynch enable me to realize many counter-intuitive truths about how the financial markets work and to uncover the challenges faced by many new investors. We believe that investing can be astoundingly simple and want to make financial education understandable for everyone.
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