Investment Insights- March 2022

Investment Insights- March 2022

March 09, 2022


The markets have turned volatile as investors digest the escalating Russia-Ukraine tensions. As uncertainty looms, there is
no clear consensus on what is likely to follow. Winston Churchill once described Russia as “a riddle wrapped in a mystery inside
an enigma.” We remain humble about the unknown future as geopolitical tensions are inherently unpredictable. Instead, this
issue of Investment Insights focuses on the potential impact these current tensions may have on your investments.


The Russian-Ukraine conflict has a long history and traces back to the dissolution of the Soviet Union between 1988 to 1991. Following the Cold
War, 14 regions in Western Russia became independent countries. In a 2005 speech, Russian President Vladimir Putin called the fall of the Soviet Union
the “greatest geopolitical catastrophe.” Among the 14 post-Soviet states, Ukraine is the most populated and is considered Russia’s lost crown jewel.2

Since gaining independence, Ukraine has experienced political turmoil. In the 2004 Ukrainian presidential election, Russian-supported candidate
Viktor Yanukovych initially won the election. A series of protests against election fraud, known as the Orange Revolution, forced a recount. As a result,
reformist candidate Viktor Yushchenko became the President instead. In 2010 Yanukovych made a comeback and won the election against reformist Yulia

In 2014 a series of violent protests known as the Revolution of Dignity occurred as a result of Yanukovych’s refusal to
sign a partnership with the European Union (E.U.). Ukraine’s parliament relieved Yanukovych of duty, and an interim
government was placed into power. Yanukovych fled the capital to Crimea and asked Russia for assistance. Putin
convened a meeting to discuss the extraction of Yanukovych and decided that “we must start working on returning
Crimea to Russia.”3

The Russian army subsequently annexed Crimea, and the Donetsk and Luhansk regions were
determined autonomous by their citizens.
In November 2021, reports surfaced with satellite images showing the build-up of Russian troops on the Ukrainian

In December 2021, the Russian government demanded that NATO never accept Ukraine and other former
Soviet republics.5 The U.S. and NATO replied by reinforcing NATO’s “open door” policy but suggested a “principled and
pragmatic evaluation” for diplomacy in the future.6
On February 21, Russia recognized the independence of the Donetsk and Luhansk regions, and Putin ordered the military into those regions

for a “peacekeeping” mission.7 Three days later, Russia launched a large-scale attack on Ukraine.As of February 25, the situation in Ukraine continues to evolve, and the
future of this crisis remains uncertain. Russia’s goals may be to pressure Ukraine to seek peace, partition the country, or enact a pro-Russian government.


The markets continue to experience volatility as they digest the developments in Ukraine. Markets are likely to
remain volatile over the short term. Over the long term, the current crisis can significantly impact the Russian
diplomatic relationship with Europe and the U.S.; however, not necessarily the markets broadly. While geopolitical
tensions have impacted stock market returns in the past, they are not the main driver of returns.
Historically, corporate earnings have served as the key driver of the U.S. stock market. To illustrate this, take a look
at historical data comparing S&P 500 vs. S&P 500 earnings and the Geopolitical Risk (GPR) Index below. GPR is a
monthly index calculated by counting words related to geopolitical tensions in leading international newspapers.
The graphs below show that fundamentals (earnings) primarily drive stock market returns.


The current crisis has become a major geopolitical event and will likely cause more human suffering before it ends.
While geopolitical tensions have some impact, the stock market is primarily driven by corporate earnings. Thus, let’s
closely examine the earning trends of U.S. companies.
The U.S. economy continues to grow along with corporate earnings. In the last quarter of 2021, the earnings per
share (EPS) of the S&P 500 grew 30.9%; and 77% of companies beat their earnings estimates.9
The top line also
experienced strong growth of approximately 15.5%, with 78% of companies beating their revenue estimates.10

Over the next three years, U.S. corporate earnings are expected to grow. Over the next 12 months, earnings are expected
to grow by more than 20% and approximately 10% for the two years after.11 The financial conditions of these companies
are also expected to improve. Additionally, net debt per share is expected to reduce over the next three years.12

The direct impact on the revenue of the S&P 500 from the current crisis in Ukraine will likely be limited. In fact, according
to FactSet, the combined revenue exposure of the S&P 500 to Russia and Ukraine is about 1%.13 The indirect impact
through supply chains and trade, however, remains uncertain. This is a possible reason why the markets have been
volatile. The robust economic backdrop, however, suggests that as long as the conflict doesn’t spill into other regions,
the crisis’ impact on markets will likely be limited in the long run.

Stock Market Returns After Correction

As well as strong expected growth in earnings of U.S. companies, another reason to be optimistic is the historical
returns following a market correction. As of the market close on February 22, the stock market had declined by
approximately 10% from its all-time high. Over the past 42 years, the stock market returns following a 10% to 15%
market decline were positive all but once in the following year.

In addition to the stock market’s history of being higher 92.3% of the time following a 10–15% market
sell-off, the subsequent returns over the next year have also been strong. Of course, the future may not
look anything like the past. It is also possible that the current market decline becomes larger than 15%
down. Nevertheless, the historical perspective can be helpful, especially when no news seems positive.

1 “Putin, before Vote, Says He’d Reverse Soviet Collapse If He Could: Agencies.” Reuters, Thomson Reuters, 2 Mar. 2018.
2 “‘The Crown Jewel That Was Lost’: This Is Why Putin Wants Ukraine - CNN Video.” CNN, Cable News Network, 18 Feb. 2022.

3 “Putin Describes Secret Operation to Seize Crimea.” Yahoo! News, Yahoo!.
4 Brown, Jon. “Satellite Imagery Indicates Russian Military Activity on Ukraine Border.” Fox News, FOX News Network, 6 Dec. 2021.
5 Martínez, A, and Charles Maynes. “Russia Demands Ukraine and Other Ex-Soviet Republics Be Barred from Joining Nato.” NPR, NPR, 17 Dec. 2021.
6 Antonov, Dmitry, and Humeyra Pamuk. “U.S. Responds to Russia Security Demands as Ukraine Tensions Mount.” Reuters, Thomson Reuters, 27 Jan. 2022.
7 “Putin Orders Troops into Eastern Ukraine on ‘Peacekeeping Duties’.” The Guardian, Guardian News and Media, 21 Feb. 2022.
8 Dave Clark and Thibaut Marchand for AFP. “Russia Invades Ukraine, Dozens Killed.” The Moscow Times, 25 Feb. 2022