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Do Significant Geopolitical Events Tend to Precede Equity Bear Markets?

Thomas O'Mahony, Sean Duffin

No. Global equities tend to sell off following major geopolitical events, but such declines have historically been mild and short-lived, far below the 20% drawdown threshold that is typically considered a bear market. We view this historical tendency as a useful, but imperfect, benchmark in thinking about the impact of the current Russia-Ukraine crisis on equities, provided the crisis does not escalate into a war involving NATO countries.

In the last ten major military-related geopolitical events dating back to 1980, global equites have declined 5.8% on average. And, these sell-offs were typically swift, lasting on average just under three weeks. The event most like the current situation may be the Russian annexation of Crimea in 2014. During that episode, global equities declined just 3% over six trading days and reached a bottom before Russian President Vladimir Putin officially announced the annexation. European, and specifically German, equities underperformed, due primarily to the energy linkages between Russia and Europe.

Still, the current situation in Ukraine is extremely volatile and the risk of miscalculation among world leaders is high. This week, President Putin ordered the dispatch of troops into two Russian-backed separatist regions of eastern Ukraine after unilaterally recognizing their independence. World leaders widely condemned the announcements and initiated sanctions against Russia, which included halting the Nord Stream II pipeline project and banning secondary trading of Russian sovereign debt issued after March 1.

If Russian recognition and support remain limited to the separatist regions within their existing boundaries, then further military action and asset price contagion may be limited. However, escalation remains a distinct possibility based on President Putin’s endorsement of separatists’ claims to the entire Donbas region of eastern Ukraine. In the event of a large-scale Russian invasion, western countries could ban Russia from the System for Worldwide Interbank Financial Telecommunications (SWIFT) or bar large state-owned Russian banks from transacting in US dollars, either of which would further isolate Russia.

Any further escalation could send Russian equity prices even lower; the MSCI Russia index is down 22.7% YTD in USD terms. Nonetheless, the limited impact on firms in other countries, combined with Russia’s modest weight in global and emerging markets benchmarks, mean that the direct impact of western sanctions on global asset prices may be relatively minor. But a more material decline in global equities would be likely if military activity escalates such that western forces get directly involved.

More specifically, energy prices and European markets may be impacted by the German decision to freeze approval of the Nord Stream II gas pipeline. At present, Russia supplies around 40% of Europe’s gas, and, given the current tight supply/demand fundamentals, this decision could increase the possibility of price spikes. Moreover, Russia could decide to retaliate against western sanctions by reducing its gas exports, although this would likely hurt Russia’s less-diversified economy more than Europe’s. In any case, a protracted dispute and higher energy prices could impact growth in Europe and beyond.

Thus far in 2022, markets have been driven more by inflation data, expected central bank actions, and the impact of both these factors on interest rates. These considerations, along with the general growth backdrop, will likely continue to be the dominant drivers of markets in the medium term. Nevertheless, given the uncertainties surrounding the evolving Russia-Ukraine conflict, we recommend that investors ensure adequate equity diversification, especially from a geographic regional standpoint. Protecting against the risk of home bias in markets that could be disproportionately affected by further escalation should be a particular consideration for European investors. In addition, high-quality sovereign bonds still have a role to play in effectively constructed portfolios due to their safe-haven status, despite their depressed yields.


Sean Duffin
Investment Director, Capital Markets Research

Thomas O’Mahony
Investment Director, Capital Markets Research