Seeing pictures from war torn Ukraine is heartbreaking. The list of dreadful outcomes reaches far and wide, from humanitarian dislocation to disregard of international accords to economic damage. Everyone is in this fight whether they like it or not. One silver lining is the reunification of a deteriorating European Union. Along with non-European countries, western democracy solidarity seems steadfast in its voice not to revisit similar past events.
We realize there may be questions about the economic and market impacts. It is important to recognize the Russia-Ukraine conflict is fluid, making any remarks subject to change.
1) What’s the exposure to Russian and Ukrainian companies within my portfolio?
a. There are a relatively small number of Russian or Ukrainian publicly traded companies on world stock exchanges. Many of the international and emerging market funds began paring back Russia and Ukraine exposure leading up to the conflict. Client portfolios have minimal direct exposure if any at this moment.
2) What’s the Russian and Ukrainian contribution to world economic activity?
a. Russia accounts for approximately 1.75% of world Gross Domestic Product (GDP) and Ukraine accounts for approximately 0.18% of GDP1. The U.S. is about 24.7%1. A closer comparison is our northernly neighbor, Canada, which accounts for 1.94%1, equivalent to Russia and Ukraine combined.
3) How will the Russia-Ukraine conflict impact the global economy?
a. Russia’s biggest global contribution is oil, 12% of world production2, and natural gas, about 17% of world production2. Russia, and reactions to Russian aggression, can impact the global energy markets, hence the recent higher energy prices. Further, energy is an input cost to every product and service contributing to inflationary pressures in the near-term and potentially systemic long-term pressure.
4) The media says 7% of oil we use comes from Russia!
a. The U.S. is mostly energy independent and imports a very small portion of oil for our needs. The 7% oil import boils down to about 1% of total U.S. consumption3. This is more difficult to measure as the U.S. “imports” oil to turn it into refined petroleum products for export, hence Russian oil may not stay Stateside. 52% of imported oil comes from Canada3. No natural gas is imported from Russia3.
5) I’m starting to read about an oncoming recession. Is that correct?
a. The typical media’s negative sensationalism team has been hard at work. Military conflicts can preface economic difficulty, but the “war equals recession” narrative is not an accurate claim. In fact, military conflict tends to be a boon to economic activity. Of more concern is the Federal Reserve rate action staged to begin this month.
6) Should we do anything different?
a. Although difficult during periods of turbulence, focusing on your long-term goals, investment horizon and long-term risk tolerance are the most important tasks at hand. Making decisions in an emotionally charged environment is more often counterproductive. Maintaining a well-diversified portfolio is paramount to success in volatile times.
News outlet brevity can often miss important finer details which can be a disservice to their audiences.
1The World Bank, worldbank.org 2BP Statistical Review of World energy 2021 3U.S. Energy Information Administration, eia.gov
The opinions expressed are those of Heritage Financial and not necessarily those of Lincoln Financial Advisors Corp. Forward-looking statements may be subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Diversification may help reduce, but cannot eliminate, risk of investment losses. CRN-4543573-031522
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