Russia launched a full invasion of Ukraine on the 24th of February when President Putin declared war via a televised update. Most countries have responded with harsh sanctions against Russia and there is a high likelihood of more to come.
Markets initially reacted negatively to the news, but most recovered to finish the last week in February in positive territory. Since then the markets continue to be volatile. We see these as still quite modest declines in the context of the strong returns that have been enjoyed over the past five years or so.
Since the invasion, major economies have implemented measures to shut the Russian central bank and several other Russian banks out of the global financial system. Whether this has knock-on effects to Western financial institutions is unclear, and depends in large part on whether the US Fed and the European Central Bank step in to provide liquidity like they did in 2008 in the Global Financial Crisis.
Portfolio exposure to the Russian Stock market
The Russian stock market was down around 30% on the 24th of February and has fallen over 50% since October last year. It is largely made up of commodity and energy-related companies, particularly oil and gas.
The direct impact on NZ portfolios will be limited. The Russian stock market is not part of the developed market equity index and only a small component in the emerging markets index (around 3% as of 31 December). This means that your total Russian equity exposure is around 0.1%. We do not believe there is any material exposure to Ukrainian stocks in client portfolios.
The largest exposure to Russia is via passive emerging markets funds, either iShares Emerging Markets IMI Equity Index fund, at 2.9%, or Dimensional Emerging Markets at 1.5% as of 31 January 2022.
Announcements from these Fund Managers
BlackRock (owns iShares): Russia has closed its market and has prohibited international investors from selling securities. As a result, a number of international and emerging markets portfolios still hold small positions in Russian securities, and the value has declined over the last several weeks. BlackRock will exit all residual positions in Russian securities whenever and wherever regulatory and market conditions allow.
Dimensional: On March 1, 2022, Dimensional’s Investment Committee removed Russia from its list of approved markets for investment. The Committee considers a variety of factors when evaluating a market’s eligibility for investment, which include, among others: government regulation, restrictions on foreign investors in that market, and market liquidity.
We are continuing to monitor developments closely. As always, we believe that a well-diversified portfolio is the best way to navigate uncertain times. Trying to time markets and predict geopolitical events is extremely challenging, and not something we believe is likely to add value.