February 14, 2022

Geopolitical events often follow a standard blueprint. The event consumes the headlines. Investors show some panic, causing a period of market volatility. And, finally — so long as fundamentals are not broadly impacted — financial markets go back to what they were focusing on prior to the fire alarm. Currently, that’s inflation and the central bank reaction function. Our monthly Perspective Newsletter details broader asset allocation (no changes were made this month); while this short note provides specific thoughts on Russia-Ukraine.

Exhibit 1 shows a number of geopolitical events over the years and how financial markets responded — both in terms of the length and size of the drawdown as well as the period of time it took to regain previous levels. On average the markets lose around 4% and make up those losses in just over a month. The current geopolitical event is occuring at the time of another pressing question for the markets — the timing and scope of Federal Reserve tightening. As such, it’s a bit difficult to disentangle the two — but, overall (driven by both), we’ve seen global (U.S.) equity markets fall by 8.6% (10.5%) at their lowest (January 27) only to rebound by 5.7% (6.6%) — and are currently down 5.2% (7.6%) year-to-date. We view this market weakness as an opportunity — with the global growth story supporting an overweight to risk, specifically in developed equities, high yield and natural resources — even in the face of current uncertainty (though, the markets are never “certain”).


Historically, geopolitics do not impact financial markets for long unless the market outlook fundamentally changes.

Source: Northern Trust Asset Management, Crandall, Pierce & Co


Outlining scenarios and assigning probabilities is always a useful tool with uncertain events such as geopolitical tensions and risks. Below we outline the three most likely scenarios, our best guess at each scenario’s likelihood and the impacts on the fundamental inputs of growth and inflation.

Full Invasion: Russia invades with the intention to take full control of Ukraine (10% probability).

  • Growth Impact: Negative for emerging and developed Europe. Trade would be negatively impacted and, depending on the sanctions regime that gets implemented, European financial institutions run the risk of capital impairments on Russian and Ukrainian assets. Higher energy prices would also hurt economic growth, and uncertainty over energy supplies would be a headwind, too (double whammy).
  • Inflation Impact: Energy prices move higher and second-round effects likely kick in.

Partial Invasion: Russia consolidates its de-facto control of the Donbass region and perhaps some other parts but does not attempt to take full control of the country. In doing so, it sends a signal to the Western World how seriously it takes its security (40% probability).

  • Growth Impact: Negative but muted, and not a game changer for developed Europe depending on the sanctions regime.
  • Inflation Impact: Short-term negative but could fade relatively quickly if the situation stabilizes and energy markets remain functioning.

No Invasion: Russia retreats a large part of its troops (although it is likely Russia will also maintain a very meaningful presence for longer) but gets enough diplomatic concessions that it refrains from invasion (50% probability).

  • Growth Impact: Positive but muted and mostly due to lower energy prices.
  • Inflation Impact: Positive through lower energy prices, which will shorten the time for headline inflation to return to target.



Investment portfolios are subject to market risks (short or longer-lived) all the time. And, as such, the first conclusion is an oft-repeated one: the portfolio’s risk aversion should mirror that of its owner. This means having an allocation to risk-control assets (cash, investment grade fixed income and inflation-linked bonds) commensurate with the amount of protection the owner wishes to have against broad downturns in equity markets (and related risk assets such as high yield, real assets and alternatives). At their best, risk-control assets gain value during risk asset downturns; at their worst (at least in the century of data we have) risk-control assets at least provide downside protection. Having the right mix of risk-control and risk assets is always the first — and most important — decision to make. Beyond that, certain asset classes (even within risk assets) are in the portfolio to provide an answer for more acute risks that arise from time to time. We believe a strategic position (and tactical overweight where appropriate) to natural resources can help navigate the current environment given the likely impact a Russian invasion would have on oil and natural gas supplies, specifically into Europe.

Northern Trust Global Asset Allocation

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