Asset Class Implications of the Russia-Ukraine Conflict

Russia has invaded Ukraine. Our Franklin Templeton Investment Solutions team reflects on the human tragedy that is occurring as they also parse the data to understand the resulting economic and market implications. If the conflict remains protracted, it may produce a “low growth, high inflation” environment, in which case nimble management and keen attention to policy responses will be required.

Key Points

  • What happened? Russia invaded Ukraine, Western sanctions are escalated and geopolitical uncertainty increases.
  • Macro Implications: Lower demand as energy prices increase, and higher inflation expectations. Both pose challenges for policymakers as interest rate tightening cycles appear imminent.
  • Multi-Asset Implications: Geopolitical outcomes have varied over history. The risk is that we move into a higher inflation/lower growth environment, which can be challenging for risk assets.

What Happened?

On February 24, Russia invaded Ukraine and shelled military installations across the country after weeks of diplomatic and military escalation. Our initial thoughts are to reflect on the human tragedy and suffering that is unfolding. The human toll is not lost on us as we analyze the economic and market ramifications of this conflict.

The invasion follows a precedent—Russia invaded the Georgian province of Ossetia in 2008 and, in 2014, annexed the (formerly Ukrainian) Crimean Peninsula. This is consistent with Russian President Vladimir Putin’s intentions to reverse Russia’s waning power.

In response, Western countries imposed sanctions on affiliates of the Russia government. Also, troops were moved to forward positions as military tension escalated. Importantly, policymakers have been reluctant to directly target any additional Russian energy companies or bar Russia from the SWIFT payment system.