Despite a couple of positive sessions over the last week, global equity markets have faced continued downward pressure in the wake of the Russia-Ukraine conflict. The war has escalated quickly, with European markets bearing the brunt of the drawdowns (falling more than -4.0% on Tuesday alone). Its global peers have also felt the effect of the uncertainty that the conflict presents. This week we have seen sanctions ramped up and there are already signs that parts of the Russian economy and economic systems are under intense pressure. The sanctions are designed to force Putin to take a backward step and investors will keep a close eye on the diplomatic talks that have been taking place this week.
In our note last week, we touched on a trend that has historically been seen in equity markets in the face of war. (Markets fall before a conflict and rise when war breaks out.) However, given that much of this year’s initial drawdown in global markets can be attributed to uncertainties relating to the rising interest rate environment and elevated inflation, we’ve also looked at wider periods of volatility:
The table above shows the ten worst calendar-week returns for global equities since 1990; the number of days before a full recovery has been observed after the fall; and the performance of global equities over the next one and three years. As can be seen, on only two of these occasions did markets remain at lower levels for more than a year and after three years there was only one instance where this happened, although we have yet to reach the three-year mark following initial falls due to Covid.
Whilst this is no guarantee of what a potential recovery might look like this year, it does illustrate that over time, as concerns and unknowns are priced in during bouts of heavy volatility, equity markets have historically performed strongly after a sell-off.
Through January and February this year investors have taken cash out of markets that have provided robust returns over recent years. It is unsurprising that during these times of uncertainty the more expensive areas of the market sell off, but it is also true that many sectors now sit at more attractive levels than they did two months ago and investors will find opportunities across the spectrum.
As the ever-elusive crystal ball remains unavailable, it is hard to know how the crisis in Ukraine will play out. There are a number of possibilities, few of them attractive. However, history tells us that although we have endured a difficult start to the year, markets have more often than not been resilient over the long term.
Source: Refinitiv – Market returns as at 03/03/2022