First, some housekeeping. This piece is being penned on Saturday, Feb. 26, so it's possible that when it's published, the crisis in Ukraine could be worse or it could be over.
With that in mind, the S&P 500 traded modestly higher last week, rocketing higher on Thursday and Friday as Russian forces invaded neighboring Ukraine. Determined to stay out of the conflict in terms of direct military involvement, the West is levying sanctions against Russia, President Vladimir Putin and some of the country's oligarchs.
Problem is Putin was likely prepared for the sanctions and they're not acting as a deterrent. Not yet anyway. Those actions may actually be emboldening the Russian leader. As advisors know, financial markets hate uncertainty and uncertainty of the geopolitical variety is arguably markets' least favorite.
So there's some silver lining here because many clients weren't invested during prior armed conflicts and those that were still need guidance on asset classes, including going beyond gold and knowing that oil tends to rise when countries rich in that commodity are the center of controversy. Regardless of the outcome in Eastern Europe, there's likely to be another conflict at some point in another part of the world that roils global markets, meaning this is an ideal time for advisors to go over geopolitical crisis strategies with clients.
Emerging Markets Issues Galore
Even before Russia invaded Ukraine, plenty of market observers weren't enthusiastic about emerging markets equities and that's despite the fact that Russian stocks represent small percentages of related benchmarks and Ukraine is basically nowhere to be found in those indexes.
However, there's still a case for emerging markets debt, particularly for risk-tolerant, yield-hungry clients, and that's true even as the Federal Reserve nears March interest rate hikes. Plus, sanctions against Russia aren't likely to severely punish broad-based emerging markets debt funds.
“The next round of sanctions may be stronger, but we believe they will focus on the same targets: sovereign, state owned entities (especially banks), strategic industries and individuals. Any sanctions that result in the inability to transact in Russia related bonds will lead to the removal of those bonds, or the country, from emerging market debt indices,” according to VanEck research.
The VanEck J.P. Morgan EM Local Currency Bond ETF (EMLC) yields 5.88% and allocates just 4.48% of its 359 holdings to Russian debt.
Bitcoin and Gold, Too
Gold – a favored destination during times of turmoil – is doing its job this, finally participating in the broader commodities rally. Still, there's speculation – emphasis on “speculation” – that due to Russia's status as one of the largest holders of the yellow metal, there could be an effort to intentionally force prices lower.
Time will tell if that happens. It probably won't. In the meantime, bitcoin is another source of advisor/client conversations because the largest digital currency isn't acting like “digital gold” in the face of the Russia/Ukraine conflict, but there is evidence that the situation in Eastern Europe is actually boosting bitcoin's usage case.
“Thinking longer term, if Russia manages to claim Ukraine and maintain control over Europe’s future energy supply without a violent NATO response, Bitcoin’s value to the Kremlin may grow as a counterbalance to the U.S. Russian President Vladimir Putin has previously noted 'certain competitive advantages' in the country when it comes to mining, given the energy surplus,” concludes VanEck.
Bottom line: Geopolitical conflicts aren't pleasant, but they do provide advisors with reasons to engage clients and clients are sure to appreciate that.