Two months have passed since Russia sent troops into Ukraine, and it is fair to say that the world has changed dramatically as a result. As peace talks falter and Russia begins another offensive in the Donbass region, the conflict looks set to continue for some time. Politically, it is clear that the conflict has massively altered the state of international relations, as the majority of UN General Assembly voted to condemn Russia’s actions. Financially, one might assume that similar repercussions have been felt – so has this been the case?

Indeed, the initial reaction in the markets was turbulent. In March, the FTSE 100 suffered a one-day drop of more than 250 points following the news of a fire at Ukraine’s Zaporizhzhia nuclear power station and its capture by Russian forces, taking the weekly loss to 6.7, the biggest since the beginning of the pandemic. Meanwhile, the conflict has exacerbated market turmoil prompted by energy and supply chain issues, with the S&P 500 down by 13.4% in the year to date to the intervention.

At the time, all of this may have come as a surprise to some investors – particularly those who had bonds and equity funds exposed to Russia at the beginning of the year, and those who doubted that the conflict would ever transpire. In fact, many in the investment world shrugged off the threat of sanctions, arguing that it would damage the global economy too much. However, the past two months in the markets have seen unprecedented sanctions placed on almost all facets of the Russian economy – actions that have introduced fresh volatility in the global markets.

Two months into the conflict, it seems like a timely moment to re-evaluate how investors have responded and whether investment strategies have been impacted by the ongoing crisis in Ukraine.

The investor response to the invasion of Ukraine

Inevitably, geopolitical tensions have the ability to shape the financial markets. However, historically speaking, the markets have reacted perhaps more mildly than anticipated in the face of crisis – despite what many might expect. In the midst of the Second World War, for example, the Dow Jones Index was up by 50%, reflecting the mercilessness with which the markets often respond to conflicts.

In this particular case, it appears that many investors have not opted for a reactive response. In fact, recent research conducted on behalf of HYCM found that only 14% monitor the situation when thinking about their investment strategy, and even fewer (10%) have made changes to their strategies in the past two months. Indeed, patience is a virtue, both in life and in investing – despite initial volatility following the intervention, investors appear to be taking a wait and see approach as the conflict continues to unfold.

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Ethics and escalation: will investors rethink their investments?

However, while investment strategies have not yet changed significantly, it is clear that investors hold strong opinions about the future market impact of the conflict as well as potential plans to mitigate the long-term effects. Make no mistake, the vast majority of investors (69%) believe that trade between Russia and the West will be irreversibly changed by the crisis in Ukraine – obviously, this will have some serious repercussions on investors’ portfolios.

Perhaps the most surprising impact of the conflict in the investment world has been the growing importance of moral principles when it comes to choosing investments. In fact, the majority of investors (67%) think that consumers and their peers in the investment landscape are prepared to boycott companies that refuse to cease operations in Russia.

Indeed, as only 8% of investors are concerned that they rely too heavily on Russian assets and the expectation of a rouble crash, this is unlikely to be a prospect that will concern too many UK-based retail investors. That said, a significant 44% admitted that they will reconsider investments that have exposure to countries and companies that support Russia’s actions, and it is clear that investors look set to use their moral compass to guide their activities for the foreseeable future.

So how are investors planning to map out their investments should the conflict develop into a protracted one? At present, 37% of investors say that they will consider investing more in ‘safe haven’ assets such as gold, government bonds, defensive stocks and currencies if the threat of a longer conflict continues to grow. Elsewhere, defence and cybersecurity stocks look set to be popular, with 25% of those surveyed overall stating that they will look to invest in these areas in the event of escalation.

Clean energy or a return to coal?

Meanwhile, the conflict has sparked a wider debate in the investment world concerning the future of environmental, social and governance (ESG) investments. Before the military actions took place, the defence sector was not typically included in ESG funds due to concerns over the morality of the arms trade, and was even labelled as “socially harmful” by the EU.

Now, however, these views appear to be shifting. In order to provide aid to Ukraine, and other countries with limited military power, many in the investment world have underscored the important role that industry can play in ensuring the safety and security of these states. As such, a reassessment of whether defence stocks constitute ESG is under way. Already, Swedish bank SEB, for example, has made a U-turn on its policy of banning defence stocks from its ESG funds, with six more ESG funds now permitted in the defence sector.

For investors, one in four (25%) plan to increase their own investment in defence stocks if the conflict escalates, while 17% of investors surveyed with the largest portfolios would classify defence stocks as legitimate ESG investments.

Recalibrating global energy investments

Perhaps a more worrying development in the ESG world right now concerns investors’ perspectives on the global energy market, which has taken yet another hit as a result of the conflict.

Indeed, in an effort to ‘starve’ Russia of the resources it requires to continue the aggression, the West has placed sanctions banning the import of Russian oil and natural gas. While the UK does not rely heavily on Russia for its energy supply, accounting for just 8% of total oil demand and less than 4% of the UK’s natural gas supply, other countries such as Germany have struggled to place outright bans on Russian imports. Likewise, the sanctions could have serious structural implications on long-term supply.

With Russian oil and gas out of bounds, 59% of investors made an optimistic appraisal of the situation, speculating that long-term uncertainty in the energy markets will initiate a shift towards green metals, nuclear power and ‘cleaner’ energy stocks in the long term. Certainly, government pledges to increase home-grown wind and solar power in the UK would support this shift in investor sentiment.

That said, HYCM’s research revealed a more damning short-term perspective on the energy market, as half (50%) of the investors polled expect net-zero goals will take a hit because of the conflict, with investors returning to ‘dirtier’ energies such as coal to account for the initial energy deficit that the exodus of Russia’s resources has created.

All told, as the situation in Ukraine continues to unfurl, civilians and investors alike are likely to become increasingly concerned about the prospect of escalation. However, in the meanwhile, individuals may be able to find some small solace in the fact that the markets have so far kept a level head in the face of chaos.