WeekWatch

Peace talks on ending the war in Ukraine will continue today in Washington, this time between President Zelensky and President Trump. It follows weekend talks between President Trump and President Putin aimed at agreeing a ceasefire.

Yet with ongoing uncertainty about the outcome, the market reaction has been mixed. Oil prices fell slightly following Friday’s Alaska meeting. European equities started the week on a muted note. In contrast, many markets across Asia ended higher.

But how has the war impacted markets over the period of the conflict? And what might the picture look like for investors going forward?

The market ups and downs

In the immediate aftermath of the invasion energy costs soared, hitting businesses and consumers hard. This also fuelled inflation, which was already high due to countries implementing fiscal stimulus measures in response to the Covid pandemic. Initially markets sold off, especially in Europe where there were widespread fears of a prolonged recession. This reflected its geographical proximity to Russia and deep trade links. The Stoxx 600 fell by almost 4%, while the tech-heavy Nasdaq dropped by 3.2%. US Treasury yields (which move in the opposite direction to prices) dropped sharply as investors sought safety in US government debt.

There is no doubt the Russo-Ukraine conflict – the largest seen in Europe since WWII and the most costly in terms of lives and expenditure – has shaped markets. It has also fuelled growth in sectors such as defence, and driven record profits for the big 5 oil companies (BP, Shell, Chevron, ExxonMobile and TotalEnergies). According to a report published in February by campaigning and investigation organisation Global Witness, the world’s largest oil companies have made $380 billion in profits since the invasion of Ukraine began in February 2022.

Now, 41 months on, it seems as if the world has largely settled into a ‘new normal’, where global volatility is viewed as par for the course. We take a closer look at where we are now.

Equities

Global equities were initially sold off following the invasion, especially across Europe. This was because Europe was heavily reliant on cheap Russian gas for households and businesses. In Germany, the ‘industrial powerhouse’ of Europe, the DAX 40 index initially fell by 5%. It was already struggling due to issues such as an ageing population and infrastructure problems. The conflict therefore added pressure to a stagnating economy.

Yet after beginning to recover towards the end of 2022, global equity markets have largely been on an upwards trajectory since says Will Hargreaves, Multi-Asset Analyst at St James’s Place.

“The real shock for markets came at the start of the conflict, with energy prices spiking violently in the early months of the invasion due to supply fears. However, they then trended downwards as global demand for Russian supplies was re-routed.

“Following the invasion global equities sank to the lowest point in October 2022. However, they've been on an upwards trajectory since. Long-term growth is good and equities have delivered – albeit there are variations in performance.”

Will adds: “Developed markets have continued to outpace emerging markets quite substantially. In terms of geographical regions, Japanese equites outperformed all other areas in local currency terms. The US followed, while the UK just outperformed Europe over this time.”

Both the S&P 500 and the FTSE100 have reached record highs this year. In late July the latter passed the 9,000 mark – the first time in its 41-year history.

In Asia, Japanese and Taiwanese shares ended today at record highs. Japanese shares have risen on a bullish corporate outlook, a more relaxed assessment of the tariff backdrop and the yen’s continuing weakness. This helps exports for domestic automakers. Likewise, investors in Taiwan have been buoyed by the outlook for its tech sector and a more optimistic tariff assessment.

Energy

The invasion of Ukraine by Russia had a huge impact on the global energy sector, with steep spikes in the price of oil, natural gas and coal. Natural gas rose nearly 300% in price. Meanwhile the cost of Brent crude oil reached $139 a barrel, up by around 30%.

This also created significant market volatility. Energy prices reached a peak in August 2022, before falling back as countries looked to reduce reliance on Russian gas and diversify their energy supply. However, in many parts of Europe, and across the UK, energy prices remain higher than they were prior to the invasion.

Carlota Estragues Lopez, Equity Strategist at SJP, says: “The most important sectoral impact of the invasion was on energy prices. But, on the positive side, there have been some structural changes as a result of that invasion.

“Europe has realised the risks of being over reliant on external energy suppliers so are looking to become more self-sufficient investing in their own energy infrastructure.”

There is also a fresh focus on the importance of renewable energy, as countries look to move away from being dependent on fossil fuels too. And it is a pattern being seen globally, according to the International Energy Agency, as countries become more aware of the need to ensure they have secure energy supplies and systems in place.

In a paper published on its website, it says: “The war continues to reshape the global energy system in profound ways. Trade patterns for oil and natural gas have shifted dramatically since Russia’s invasion as governments look to strengthen their energy security. At the same time, cleaner alternatives to fossil fuels are growing faster than ever.”

Defence

There is no doubt that the defence sector has seen substantial growth as a result of the war in Ukraine and the changing geopolitical situation.

In June, Germany pledged to increase its defence budget to 3.5% of GDP by 2029. Overall, it plans to spend $781 billion on defence in the next five years. As well as providing a massive boost to the defence sector, it hopes to revitalise the economy and spur growth.

Meanwhile, the UK has committed to raising its defence spending to 2.5% of GDP by 2027 and to 3% of GDP by 2030.

Carlota says: “Industrial earnings in Europe – especially in the defence sector – have been buoyed by a surge in defence spending following the invasion. Companies such as Rheinmetall and BAE Systems are experiencing record demand. Meanwhile NATO has committed to raising defence budgets significantly by 2035.”

Technology

Much of the growth in developed markets over the past 41 months has been driven by the AI-boom. This is particularly the case in the US where the Magnificent 7 tech companies make up around a third of the S&P 500 by market capitalisation. This group includes Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.

The S&P 500 is up 10% year to date, with much of this growth due to the Magnificent 7 companies. Spending on AI and related infrastructure is estimated to have added 0.5% to US economic growth in the first half of this year, according to Pantheon Macroeconomics.

The dominance of US technology companies also means that growth stocks have outperformed value stocks and large caps have outperformed small caps over the period.

But can the tech and AI success story continue? Valuations of US companies, especially tech, are widely recognised as very high. These can only be justified if demand in the sector continues to grow strongly – and so far, it is.

SJP’s Will Hargreaves highlights the need for investors to consider the fundamentals amid the noise. He says: “AI is not a fleeting theme, it's here to stay. If you look at the Magnificent 7, especially a company like NVIDIA, it’s a really strong business. The fundamentals are solid even though their valuations are high.”

Gold

Gold is a traditional ‘safe haven’ in times of turmoil and the Russian invasion of Ukraine saw prices spike as investors flocked to the precious metal. The price of gold rose to its highest level for more than a year in the hours following the attack, reaching $1,973 per ounce. However, the main driver of gold was the rush by central banks to buy up stocks following the invasion – something which has continued to this day. According to the World Gold Council, central banks have purchased more than 1,000 tonnes of gold each year in the three years following the attack. This has caused gold prices to more than double over the period. At the time of writing, gold stands at $3,346 per ounce.

So what is next for markets?

No deal was reached between Trump and Putin at the Alaskan summit, while the outcome of the Zelensky and Trump talks remains to be seen. With Russia demanding Ukraine cede land in order to stop the war, the situation looks likely to remain volatile.

Whatever the outcome, many experts believe there will be a muted reaction from markets.

Carlota says: “The invasion sparked a sharp inflationary shock, largely driven by energy prices, and equity markets plunged sharply in the weeks that followed. The S&P 500 fell approximately 20%. Since then, markets have largely stabilised and shown reduced sensitivity to the ongoing war. This parallels earlier episodes like trade-tariff shocks, where initial panic gave way to a return to ‘business as usual.”

“Markets tend to respond more to fundamentals with enduring impact rather than headline noise. Central banks still have major influence. When the Fed signals a rate cut, markets typically react. Today, investors remain especially focused on monetary policy guidance, labour market dynamics, and economic indicators.”

For investors, while the geopolitical volatility may continue, the message remains to focus on the fundamentals and screen out the noise. As markets are increasingly doing.

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