It's unclear how things will play out between Russia and Ukraine and the markets are on edge. Photo / Getty Images
Opinion
Financial markets were still getting to grips with the prospect of rising interest rates, and now they have an increasingly tense geopolitical situation on their hands as well.
We don't know how things will play out between Russia and Ukraine from here, nor can we predict the severity ofsanctions the rest of the world will impose.
Markets will remain on edge as this situation develops, and an already problematic inflation spike is likely to be made even worse.
For New Zealand, the direct economic links with Europe are limited, at least compared to the likes of China, Australia and the US.
In the 2021 calendar year, 9.1 per cent of our total exports went to Europe, compared with a combined 55 per cent going to those other three nations.
The UK is our sixth largest market (by country), taking 2.2 per cent of our exports. The only others in the European region that make the top 20 are Germany and the Netherlands, which take 1.3 per cent of our goods each.
Nonetheless, ongoing military conflict could still lead to economic fallout, as global growth is potentially impacted and as sanctions place an added burden on already strained supply chains.
Russia is a major producer of commodities, notably oil (which has hit US$100 for the first time since 2014), but also the likes of aluminium and fertiliser. If the conflict continues, we should expect further increases in oil and commodity prices (including agriculture, which New Zealand could benefit from).
On balance, this means higher fuel costs for consumers and rising input costs for many businesses. It could put additional pressure on the cost of living, which is already rising much more than we would like.
This could leave our Reserve Bank, as well as its peers, with some tough choices to make – facing even higher inflation combined with greater economic uncertainty. They might be forced to choose between tightening monetary policy as planned to combat rising prices, or backing away from those plans to shore up confidence across financial markets and economies.
With inflation at multi-decade highs in many places, central banks will be reluctant to backtrack too far. The economic uncertainty created by the Russian invasion of Ukraine might slow these tightening plans, but it is unlikely to derail them.
In contrast, longer-term interest rates could fall, as investors head for the safety of government bonds and good quality fixed income. Gold has caught a bid in recent days, as have traditional haven currencies like the US dollar and Japanese yen.
The severity of any sanctions will be important for how this crisis plays out in the days and weeks ahead. Russia supplies a large proportion of Europe's energy supply. Should it choose to restrict this in retaliation for sanctions imposed by others, countries like Hungary, Germany and Italy are at risk.
Any type of military conflict is usually a negative for global sharemarkets, at least in the short-term. European shares have suffered most since Russia made its move, while the US (which is a relatively closed economy anyway) has held up better.
Our sharemarket won't be immune, but during uncertain periods it's the predictable, defensive businesses that usually prove more resilient. The NZX is dominated by sectors like healthcare, real estate, infrastructure and utilities, so it might be more insulated than most.
It's impossible to say how the situation develops from here. If the conflict was focused on a more limited takeover of the separatist Donbas territories, the effect on financial markets might've been short-lived.
However, the campaign seems to be aiming for regime change, which could make for longer lasting effects and a more unpredictable situation. If other nations get involved, the potential outcomes become even more difficult to predict.
The volatility we are seeing at present might ultimately prove an attractive buying opportunity for long-term investors, although it is extremely difficult to make a judgement on exactly when to step in.
Mark Lister is Head of Private Wealth Research at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision Craigs Investment Partners recommends you contact an investment adviser.