A message from our CIO, Scott Phillips:
"G'day Fools. If you're like us, you're dismayed by the events taking place in Ukraine. It is an unnecessary humanitarian tragedy. Times like these remind us that money is important, but other things are far more valuable. And yet the financial markets remain open, shares are trading, and our readers and members are looking to us for guidance. So we'll do our best to continue to serve you, while also hoping for a swift and peaceful end to war in Ukraine."
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Share markets around the world are on edge as war threatens to engulf Ukraine.
Russia has sent more than 100,000 troops to its border, making the US and its allies very nervous about its intentions.
Vladmir Putin is demanding guarantees from NATO that Ukraine would never join it, and that NATO would never have any military presence there.
Meanwhile, the US is seriously pondering the security consequences in other parts of the world if it gives in to Russia's requests.
The US evacuated its embassy in the Ukrainian capital Kyiv overnight, with staff destroying computing equipment on their way out.
Anything can happen in the next few weeks in this volatile situation.
Aside from the physical danger to 44 million people in Ukraine, how could this crisis impact ASX shares on this side of the world?
This week AMP Ltd (ASX: AMP) chief economist Shane Oliver attempted to answer this.
4 ways the Ukraine-Russia crisis can end
The way Oliver sees it, there are 4 possible outcomes from the current stand-off:
- Russia stands down
- Russia invades the Donbas, which is already controlled by separatists
- Russia invades all of Ukraine, but NATO doesn't respond
- Russia invades all of Ukraine, and NATO fights back
At the moment, the first scenario is possible, as Russia is still willing to negotiate.
Oliver predicts that would see stocks, including ASX shares, take a collective sigh of relief and enjoy a brief boost.
"It's hard to see Russia undertaking a full invasion of Ukraine given the huge cost it would incur, let alone NATO troops being involved," said Oliver.
"But some combination of scenarios 2 and 3 are possible. But the history of such events points to an initial hit to shares, followed by a rebound."
Gas to Europe critical for global economy
Any sort of invasion would trigger the US and its allies to start economic sanctions against Russia.
But if that happens, the big retaliatory lever that Putin has is to cut off gas supplies to Europe.
If Russia doesn't resort to that, Oliver sees a "brief" 2% to 4% loss for share markets and that would be quickly recovered.
The damage could be far worse if Russia cuts the gas pipeline. Global oil prices could skyrocket, and Europe could suffer from "a stagflationary shock".
If NATO doesn't deploy troops, this might mean a roughly 10% dive in share markets, then a recovery over 6 months.
If the 4th and worst scenario comes true, then this would lead to a severe shock for ASX shares.
"Invasion of all of Ukraine with significant sanctions, gas supplies cut & NATO military involvement – this could be a large negative for markets (say -15 to -20%)," said Oliver.
"War in Europe, albeit on its edge, fully reverses the 'peace dividend' of the 1990s. Markets may then take 6 to 12 months to recover."
