Market Watch: Can stocks weather war in the Ukraine?

Markets have stabilised as the shock of war and sanctions have now been priced in. Photo / AP

After an initial fall, stock markets have stabilised, suggesting they have priced in the immediate risks from the Ukraine conflict.

"We have a large political power threatening nuclear action against the rest of the world, so it's not surprising that markets have sold-off," Pie Funds chief executive Mike Taylor told Market Watch.

But if we looked back over history at large geopolitical events and the commencement of wars, markets typically fall, but often rebounded quickly, he said.

Markets had now priced in the sanctions, the effects on the Russian economy and the effects on the companies trading with Russia.

"What's not priced is an escalation of the fighting, that would spread throughout the rest Europe or, a worst-case scenario of nuclear weapons being used. That's definitely not priced in by the market," he said.

But with initial peace talks going on investors would be hoping for some kind of conclusion to the conflict in the coming days.

"That's why the market is probably stabilised. If we don't have a conclusion and the fighting does escalate then probably markets will turn lower again."

The sectors hit hardest in the initial post-invasion sell-off were largely the same ones that have been in retreat since the end of last year, Taylor said.

High growth sectors like technology, with revenue growth but no earnings, had continued to sell in the past few days.

Video conferencing company Zoom was a classic example, Taylor said.

On the initial wave of growth as the pandemic arrived it rose above US$400 a share.

"Today it is trading around $130, it has had a massive fall."

Tesla was another market darling that had taken a big fall, down around 30 per cent in the past few months.

"Often I tend to think Tesla encapsulates the market sentiment and where Tesla goes the market tends to follow," Taylor said.

More broadly investors were nervous about inflation, rising interest rates and the prospect that the conflict in the Ukraine will add to these issues.

Ukrainian servicemen walk by a deactivated Russian military multiple rocket launcher on the outskirts of Kharkiv, Ukraine. Photo / AP

Russia is a major exporter of oil, wheat and fertiliser, and prices for these things have already spiked.

"The central banks, in particular the [US] Fed, are in a bit of a dilemma at the moment because this war is going to drive up short-term inflation," Taylor said.

But if they keep pushing up interest rates then they will also slow down growth "so they've got higher inflation and slower growth".

Central banks typically tried to look through short-term inflation shocks, but that would be difficult right now given the intense public focus on already-high inflation, he said.

Investors shouldn't expect a broad turn-around in market sentiment, or a significant rally, until there were signs of inflation peaking and central banks change their outlook for interest rates.

"I think that's probably going to need to be more the second half of the year than the first half of the year," Taylor said.

The good news was that there were now signs that the pandemic was starting to recede around the world.

"If the world does reopen as we've expected in 2022 it's obviously positive for markets, positive for growth and a good countermeasure to the slow down inflation that might be occurring, as a result of higher energy and food prices."

It was hard to ignore the terrible humanitarian effects of this crisis, Taylor said.

But from an investment perspective it was unlikely to have a long-lasting effect on markets unless there was a major escalation from here.

- The Market Watch video show is produced in partnership with Pie Funds.