Financial Markets and the Ukraine Conflict: Market Impacts and Peace Scenarios
Introduction
The Russian invasion of Ukraine in February 2022 triggered significant financial market disruptions with effects extending far beyond the conflict zone. We look back at the market impacts, historical parallels, and look forward to potential scenarios following a ceasefire, highlighting some of our observations for investors to ponder.
Initial Market Shock and Adaptations
When Russian forces entered Ukraine, global equity markets experienced immediate downturns of varying severity. The Moscow Stock Exchange (MOEX) dropped over 33% on 24th February 2022, the worst day in its history, whilst the Ukrainian PFTS Index in Kyiv halted trading indefinitely after it had already been in decline from rising tensions. The German DAX fell 10.6%, the FTSE 100 dropped 6.7%, while American indices showed a distinct pattern with the Nasdaq falling 8.3%, the S&P 500 declining 7.4%, and the Dow Jones limiting losses to 5.9%.
European natural gas markets underwent a significant shift with Russian pipeline supplies falling from 40% of EU imports to under 10% within a year. Benchmark TTF Natural Gas prices reached unprecedented levels 15 times the historical average in August 2022.
UK and US equity markets displayed clear sectoral divergence. Defence contractors emerged as significant winners, as an example, BAE Systems surged 47% in the year following the invasion. Energy companies showed strong performance, with those least exposed to Russian assets amongst the top performers, however, those with significant Russian exposure encountered heavy losses.
European Banks and Financials with Russian Exposure tanked over risks related to sanctions and loan defaults. Travel stocks were hurt by restrictions and higher oil prices and high growth tech stocks and consumer discretionary stocks saw big declines as risk off sentiment reigned, consumer sentiment waned, and interest rates increased in response to rising inflation.
Although not a sole cause, the Ukrainian conflict was a significant contributor to the global inflation spike and the subsequent bear market. Inflation was rising out of the pandemic period and the US Federal Reserve was talking about raising interest rates before the war. However, the influence it had on energy and food prices and the market sell off and sentiment added significant weight.
Historical Context and Recovery Patterns
Despite the fear and human tragedy, markets generally demonstrate resilience as time passes. Markets do not like uncertainty, so wars often come unexpectedly and cause sharp market falls. Investors flee to the safety of assets like gold, bonds or safe-haven currencies, however as information is digested and considered in the context of the effects on US or UK company earnings for instance, prices stabilise and recover.
Historical analysis reveals that market recovery timelines vary significantly based on conflict parameters and broader economic conditions.
| Event | Date | Index | 1-Day Change | 1-Week Change | 1-Month Change | Time to Recovery |
| Iraq’s Invasion of Kuwait | 02/08/1990 | S&P 500 | -1.10% | -4.80% | -8.20% | 6 months |
| FTSE 100 | -2.50% | -6.30% | -10.00% | 8 months | ||
| 9/11 Terrorist Attacks | 11/09/2001 | S&P 500 | -4.90% | -11.60% | -0.20% | 1 month |
| FTSE 100 | -5.70% | -9.20% | -1.20% | 2 months | ||
| Iraq War Start | 20/03/2003 | S&P 500 | 2.30% | 5.10% | 1.90% | Immediate |
| FTSE 100 | 1.60% | 3.80% | 2.50% | Immediate | ||
| Russia Annexes Crimea | 20/02/2014 | S&P 500 | -0.20% | 0.50% | 1.50% | Immediate |
| FTSE 100 | -0.40% | 0.20% | 1.00% | Immediate | ||
| Russia-Ukraine Invasion 2022 | 17/02/2022 | S&P 500 | -1.80% | -3.20% | -1.80% | 3 months |
| FTSE 100 | -2.60% | -4.00% | -2.00% | 4 months | ||
| Hamas Attack on Israel | 07/10/2023 | S&P 500 | -0.50% | -0.80% | 1.60% | Immediate |
| FTSE 100 | -0.70% | -1.00% | 1.20% | Immediate |
It is worth noting that the level of causation these conflicts had on index performance and recoveries is varied.
Peace Deal Scenario
As news flows thick and fast regarding President Trump’s negotiations with both parties, there could be significant implications for investors. A Ukrainian peace deal would likely result in market optimism and a potential recovery in stock prices across several key sectors.
Post-Conflict Market Scenarios
For major indices, analysts project varying degrees of appreciation following a potential Ukraine peace announcement. JPMorgan estimates European indices would see the strongest response (Euro Stoxx 600: 7-9%, FTSE 100: 5-7%, German DAX: 8-10%), while Barclays forecasts more modest gains for American markets (S&P 500: 3-5%, Dow Jones: 2-4%, Nasdaq: 4-6%).
Commodity markets would likely experience significant corrections. European natural gas prices could fall significantly following a comprehensive peace agreement, while also seeing a Brent crude decline. If lasting peace comes to fruition, then Russian gas will flow. The pricing of the Dutch TTF Natural Gas Index Futures should prove an important bellwether to the progress of a peace deal scenario.
For UK equities specifically, the FTSE 250, more exposed to domestic UK and European economic conditions than the internationally focused FTSE 100, fell further at the onset of the war and would likely outperform in a peace scenario. This aligns with a recent working paper from the European Economic Association by Federle, Meier, Müller, and Sehn (2022), which suggests that in a peace scenario, the markets and sectors most negatively affected by the conflict’s onset would likely see the strongest positive reversals.
Potential Outperformers
Reconstruction and Infrastructure Companies positioned for Ukrainian reconstruction represent clear potential benefits with rebuild costs estimated at over $500 billion:
- Construction equipment: Ashtead Group
- Building materials: CRH
- Engineering firms: Atkins, Balfour Beatty, Kier Group
Consumer Discretionary Companies with Eastern European exposure would benefit from improved confidence and reduced energy costs:
- Retailers: JD Sports
- Luxury brands: Burberry, LVMH
- Airlines: EasyJet, IAG, Wizz Air
Banking and Financial Services UK banks with Eastern European exposure would likely see relief rallies:
- Global banking: HSBC
- Capital markets: Barclays
- Asset managers: Schroders, M&G
Mid-Cap Industrial Exporters FTSE 250 industrial exporters with European market exposure:
- Industrial specialists: Spirax-Sarco Engineering, RS Group, Diploma
- Engineering: Weir Group, IMI, Rotork
Potential Underperformers
Defence Sector High flying defence stocks may see a short-term consolidation as immediate conflict-driven demand and sentiment subsides. However, the war has reinforced the need for increased defence funding. Higher NATO defence spending commitments and existing order books should support long-term performance.
- Aerospace & Defence: BAE Systems, Rolls Royce
Energy Producers UK energy producers could face headwinds from falling commodity prices. However, price stability, lower volatility, and reduced geopolitical tensions may allow for better long-term planning and capital investment in renewables.
- Oil & Gas Producers: Harbour Energy
- Integrated Oil: Shell, BP.
Inflation Beneficiaries Consumer staples companies, that successfully passed on inflation may face margin pressure as retailers demand lower prices in a lower-inflation environment. The materials sector could also come under pressure as Russian steel, copper and aluminium producers come back online influencing supply.
- Household/ Personal Care: Unilever, Reckitt Benckiser
- Materials: Rio Tinto, Glencore, Antofagasta
For UK investors specifically, a peace agreement would likely trigger a rotation from conflict beneficiaries (defence, energy producers, inflation hedges) toward recovery plays (construction, consumer cyclicals, European-exposed industrials, and financial services).
Financial markets generally respond positively to peace prospects—they recognise that despite transitional challenges, peace offers superior conditions for sustainable economic development and value creation than continued conflict.
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DISCLAIMER This article is for information purposes only and no part of it or its contents are deemed to be nor should be taken as advice. It does not constitute recommendations to buy or sell any securities or funds mentioned. Past performance is no guide to future returns, and you may get back less than you invested. Capital at Risk.