What the Invasion of Ukraine Means for European Stocks

Following weeks of speculation, the news that Russia has officially invaded Ukraine comes as only a semishock for equity markets. Ahead of the attack, the European Union, or EU, approved a range of sanctions against Russia, described as the “harshest ever,” to no real effect in terms of deterrence. For markets generally, we are now in a period of high uncertainty with very limited visibility of how the situation will play out. For the most part, our European coverage list lacks material exposure to Russia or Ukrainian assets, but any prolonged conflict here could have further knock-on effects from a macroeconomic perspective.

The obvious and immediate effects of the invasion could be an acceleration in inflationary pressures, particularly on food and energy costs, with a report on Feb. 24 by Capital Economics suggesting this crisis could add 1.5% to eurozone inflation this year, potentially forcing the European Central Bank’s hand in raising interest rates sooner or harder than expected. In terms of food costs, Russia and Ukraine combined export one quarter of the global wheat supply, so any disruption here could prove material, with large supermarkets and retailers’ business models not set up to pass through rapid and large price increases. On the energy front, Russia exports more than 180 billion cubic meters of gas annually to Europe, more than 40% of the EU’s external supply. While this is a concern, we view the likelihood of material gas delivery disruptions to be low given the importance of energy revenue to the Russian government (oil revenue alone is about one third of total revenue). From a supply chain perspective, Russia and the Ukraine are not key cogs in the global system, but at the same time, with global supply chains already heavily stretched, the introduction of measures such as no-fly zones through the region will certainly not help the situation.