Though the crisis in Ukraine, and Crimea specifically continues to play out, the impact on US investor’s portfolios is likely relatively muted so far. You might find this surprising given all the heated political and media attention, but actually Ukraine is a very small part of the world economy. Even Russia represents under 3% of global GDP and Russian stocks have weakened but not collapsed. At the same time US markets have shrugged off the crisis and are very close to all time highs.
Russian investments are impacted, but are small in the context of a global portfolio
There are about a dozen Ukrainian companies, primarily food producers and industrials, that it’s possible to buy on US exchanges, but they certainly aren’t commonly held, or included in major indices. Most Russian stocks are off double digits since the crisis began, due to a weakening currency and fears about significantly worse trade prospects for Russian businesses in future. For example, Gasprom, which is about 1-2% of many emerging market funds and a relatively large global stock, has fallen significantly since the crisis began. However, even here, the impact of Gasprom on emerging market index funds is approximately 0.2% since the crisis began because these funds and indices are so diversified across many different companies and countries.
The US market has shrugged off Crimean events so far
Other markets, such as in the US, Europe and Asia, initially fell about 1% as the crisis broke, but have since largely rebounded with US markets very close to all time highs. The biggest potential impact are likely to be for oil stocks given Russia’s importance in energy markets, and certain banks with exposure to Russian assets depending on how any sanctions play out. Though in both cases, more decisions need to be made on any sanctions before the stocks can fully react, and given that portfolios for these companies are global, Russia is likely to be small in the context of their overall business for most companies. However, Russia represents under 3% of global GDP and Ukraine is about 10 times smaller than Russia. So assuming the crisis remains contained any impact to broader global growth will be small.
International diversification continues to be a valuable strategy
Holding a broad set of stocks from different countries continues to be a useful diversification technique to help improve returns over time, while lowering volatility. Though these events in Ukraine are tragic there are almost 200 countries in the world, and, essentially many more good surprises for investors than bad surprises in a typical year. For example in 2013 we saw countries such as Japan and Argentina doing unexpectedly well and outperforming the US even when the US had an extremely good year. So, for every country that, tragically, hits an unexpected crisis there are many others display unexpectedly good performance.
Photo – Vladmir Yaitskiy