In a new commentary, Philip Lawton and Noah Beck of Research Affiliates examine the recent events in Crimea and eastern Ukraine and the questions such instability raises about financial risk management.
They examine six other recent regional conflicts to look for patterns and insights into how regional turmoil affects the relevant domestic markets. Looking at both procyclical (cap-weighted index investing) and countercyclical (fundamentally-weighted index investing) strategies the team makes the following observations:
  • On average, the markets we studied rose in the six months of sabre-rattling that preceded the start of the military campaigns.
  • The markets fell sharply in the first two or three months after the beginning of the conflict.
  • On average, stock prices remained depressed for up to six months but fully recovered eight months after the wars began.
  • The average fundamentally weighted index modestly underperformed the cap-weighted index in the two years leading up to the conflict.
  • When prices recovered, the fundamentally weighted index smartly outpaced the cap-weighted index.
Lawton and Beck conclude:
“This is neither to treat the profoundly worrisome crisis in Eastern Europe cavalierly nor to advocate profiting, however indirectly, from the distress of Ukraine, a sovereign nation whose people have suffered horribly over the last three-quarters of a century. It is merely to caution international investors that, from a strictly financial perspective, withdrawing assets from Russia might not be the right move.”
To read “Ukrainian Crisis: Should Investors Avoid the Russian Stock Market?” in its entirety, please click here.