What impact does the Russia-Ukraine conflict have on markets?

Maddy: [00:02:12] Hello and welcome to you're in good company. A podcast that makes investing accessible for everyone. I'm Maddy, and as always, I'm in some very good company with my co-host Sophie.

Sophie: [00:02:22] Hello, Maddy. In person today. It's very nice to be in your company 

Maddy: [00:02:26] and great to be in the company, also of producer Sascha today. 

Sascha: [00:02:30] Hello, can you hear me? Am I on the mic? Awesome. Well, after almost a year of recording, it's been far too few times that we've all sat in the same room together.

Maddy: [00:02:41] It's nice to be here. Yeah. 

Sophie: [00:02:42] So today we're going to delve into, I guess, what's kind of happening at the moment in terms of geopolitical events and affecting the stock market. So I guess touching on what's happening in Russia and Ukraine and then the flow on effects for global financial markets. 

Maddy: [00:02:57] And I guess at the start of this episode, we just wanted to acknowledge that. I mean, it feels a little bit icky when we know what's going on at the moment to be talking about the stock market like, you know, there are people's lives. Yeah, and the world is changing forever and we're going to sit here and chat about the stock market. But I guess on the flip side of that, whilst we completely acknowledge that and feel that at the end of the day, it also is impacting our portfolios and our money and our financial situation. So I think it's good to also be across it and understand what's going on. 

Sophie: [00:03:33] Shed some light reporting on a different part, I guess. So I think a really good place to start with this is when we think about like how the world is at the moment. We're very globalised and we're very interconnected and we rely on, you know, other countries a lot. And that is why something like a war that's happening in Europe does have a flow on effect for, you know, the US and Australia. So I thought it'd be a good place to start to talk about, like what actually does Russia provide for, I guess, the global system because it does give a bit of background on how that veneer has flow on effects. 

Maddy: [00:04:05] And I guess just to take another step back, it's like J Pay is the monetary value of all the finished goods and services that a country produces. It's kind of like a school card for a country's economic health 

Sophie: [00:04:17] and for some context, like the US, makes up a really large part of that global output. It about 24 percent. China makes up about 15 percent. And Russia with these two percent, it's actually a it doesn't seem like two per cent doesn't sound like a lot against the twenty four percent, but it's actually quite a large amount. 

Maddy: [00:04:35] I guess it's kind of like you can think of it as market cap if we're thinking in like a kind of company context, like investing content. So I think like Facebook is the ninth largest company. I think Johnson Johnson is 11, so it's quite a significant contribution. 

Sophie: [00:04:51] So if you think about, say, like Apple is the number one companies, so that kind of reflects the U.S., whereas like Johnson and Johnson, which would reflect Russia, which is like they still producing billions of dollars for the economy. 

Maddy: [00:05:01] And then I guess the flow on effect of this is like thinking about exports, which is what's really playing out at the moment. So we're so globalised today, so countries really rely on each other. So when we're in a situation like we are now that can have huge impacts on all aspects of the economy 

Sophie: [00:05:18] for a country like Russia, their main exports consist of petroleum, which is petro coal, and they're actually the world's largest exporter of weights. So they not only produce things that are a necessity for countries around the world, such as electricity, you know, providing heat during the winter, but they're also providing food sources. So when that is disrupted, it's not, you know, giving up discretionary I. It's actually disrupting what people need to live their daily lives. 

Maddy: [00:05:43] And I think it's important to think about Russia's key trade partners as well, because they're the ones who I guess they're going to have the biggest impacts on them. So we're looking at China is one where also have got a lot of countries throughout Europe. So the Netherlands, Belarus, Germany and Italy make up their sort of biggest partners. 

Sophie: [00:06:02] Similar as well with Ukraine. So they export corn, iron ore, wheat, and they are the world's largest exporter of seed oil. So like your vegetable oils, again, very necessity items. So obviously, we want to acknowledge that yes, there is a humanitarian disaster going on, and we're in a very privileged position that we can talk about the economic impacts. But because in some form, because we are global citizens and we are in a globalised world, this affects us and that's why we want to stay informed. So what are the financial impacts of something like a geopolitical event? Yeah. 

Maddy: [00:06:35] Well, I think the first thing to think about that is really happening at the moment is inflation. So remembering that inflation is a rise in the general price of goods and services. And what we have at the moment is countries such as Russia that a massive exporter of oil and gas and especially to one of their major partners is Germany. So I think Russia supplies like 55 percent of Germany's gas. And you know, this is a country that is coming out of winter, always speaking, you know, early March, if they can't get gas, that's heating. That's and, you know, it's like an actual energy crisis that could potentially unfold here. Yeah. 

Sophie: [00:07:16] And I think also like in terms of like the oil supply. Oil isn't just that everyday petrol that, you know, even we're seeing at the moment, we're seeing prices of Dollars in Australia, but it's also in so many other products that it has this kind of dramatic flow on effect. It's not only for energy, but it's just in so much like if you look, if you Google, what products has oil in it, it's so extensive. 

Maddy: [00:07:39] And then I think taking a step back again, like when we did our first episode of This Is Now, we talked about how inflation was really kicking in and what the impact of that was on the stock market. So at the start of this year, we had that the US was sitting at about seven and a half percent inflation rate, which, you know, keeping in mind in Australia. We our target rate is two to three per cent like inflation is very high at the moment. What you then have is lack supply out of these countries that produce really important things being limited, which means the prices are going to go up because there's more demand, less supply. And it's kind of like central banks are in this really hot position right now where normally if inflation's high, they would increase interest rates right to try and slow it down, bring back the economy a little bit. But it's kind of in this conflicting position where you've got people who are incredibly impacted by what is going on in terms of the humanitarian crisis in. And it's like you ought to be going around increasing increasing interest rates 

Sophie: [00:08:37] when they're already struggling off the back of two years of Covid impacts its recovery that we need to say. And then all of a sudden this is stunted as well. I think the other side of it in terms of we've spoken about oil and gas is that there's going to be food shortages because we've said that Russia is a huge exporter of wheat and Ukraine's a huge exporter of corn. And it means that in times where people then can't actually access such a necessity item that can become like, yeah, political unrest and instability within these economies. 

Maddy: [00:09:05] And I guess, you know, we know the impact that political uncertainty can have on the stock market as well. So I guess the reason why we wanted to do this episode is because I think traditionally or historically when we've seen war, it's been very traditional war. Today, what we're seeing is a very different type of war. So you've obviously got Russia invading Ukraine. But what we're now seeing around the world is countries. The US, Europe, Australia, countries around the world are using finance as kind of a weapon. And then the second part of that is corporates actually stepping up as well and responding and using the power that they have in this capitalist globalised world to make an impact as well. 

Sophie: [00:09:47] Yeah. So I think it would be good to break down and have a look at kind of what the both sides of the impacts are. So what governments are doing around the world and that impact and also, I guess what corporates are doing and what that impact has as well. 

Maddy: [00:09:57] So John, give us a quick rundown speaking sort of an overarching summary of some of the sanctions that we're saying 

Sophie: [00:10:03] yes, I think it's really important to note that we're recording this on the 14th of March and we're giving a general overview. These things are changing very rapidly. So if you're listening to this at a later date, things might have changed.

Maddy: [00:10:15] So probably first step, Jonah quickly give us a rundown. What is the sanction? 

Sophie: [00:10:19] So an economic sanction, which is what we're seeing imposed at the moment, is a withdrawal of usual trade and financial relations for foreign policy and or security purposes. So, for example, it could be travel bans, it could be ban on certain exports, it could be trade restrictions and the point of economic sanctions is they want to somehow, I guess, disable the. To me, from the normal course of business. So obviously, mad says governments around the world that are contributing to this. So what are some of the sanctions that we have been saying? 

Maddy: [00:10:49] Yes, we have got in the US. Joe Biden has banned all oil imports from Russia, and gas, which is around eight percent of total imports, are pretty significant. And then on that as well, the UK has also said that they're phasing out Russian oil imports by the end of 2022. 

Sophie: [00:11:06] But I think a really important part of this is that although the US obviously is, you know, one of the biggest economies in the world and what they do is really important at the moment, the reaction from the EU is probably what is the most significant because they do rely on Russia the most. They haven't had the same luxury to be able to say that we can ban all oil and gas imports because they do rely on it so heavily. But they have been putting in sanctions around, say, the swift banking system to try and isolate Russia from being able to communicate with the rest of the world through money. 

Maddy: [00:11:39] So I think you had a really good analogy by talking about it earlier. 

Sascha: [00:11:42] I was just thinking, it's a bit like if you woke up in the morning and all your bank accounts were frozen or your credit card stopped working, you couldn't get onto your crypto account. You couldn't move things over, you weren't going to get your salary and you would literally be landlocked. Like, I think about how many things every day you touch here in Sydney, I'm using my card to touch on and off public transport my Uber account. It's just amazing how much money actually makes a difference to your life as an individual. So they are doing this to an entire country. And then also on top of that, all these oligarchs and Putin himself. And that's where a huge amount of money is tied up in Russia. So you can understand why this is having a massive effect. 

Sophie: [00:12:27] So with all these sanctions in place and what's happening around the world, what have we really seen as the impact on the stock market? 

Maddy: [00:12:34] Yes, I think the first one is the value of their currency. So it's fallen around 30 per cent against the US dollar, making it worth less than one US cent. So by devaluing their currency, it's really inhibiting their impact, I guess kind of operate with any countries outside themselves. The next one is interest rates and interest rates. Is it up over 20 per cent at the moment? So again, like making it extremely difficult for Russia to interact with anyone outside their own borders? All of these things have led to a complete stock market crash in Russia. 

Sophie: [00:13:07] So, yeah, we actually saw the MOE index, which was the Russian stock market drop. I think it was up to like 40 percent on the day that they invested in Russia because obviously people were pulling their money out of the Russian stock market. And then when people are pulling their money out, it devalues. And this impact happened across global stock markets. So we've seen it obviously on the Nasdaq, the Nasdaq was already in a correction, which we did an episode about, but now it is still dropping across Europe in the ASX. It's interesting because it does depend on the industry that you are investing in with what the impact might be because obviously, if you're investing in an oil company right now, a lot of those companies are taking a lot of profit, but there's going to be impacts, just broader impacts on every country and every company. And therefore, that's why we're seeing that. I guess overall average drop. 

Maddy: [00:13:55] So I think that really sets up for us what is happening and why it is impacting our own portfolios. But we're going to take a quick break for our sponsors and we'll be right back to tap to chat more about the impacts of the actions that companies and corporates have been taking in response to the Russian invasion. 

Maddy: [00:15:54] so the other really interesting aspect of this is that we're seeing companies obviously intervene and have a say about how they feel about this conflict. 

Maddy: [00:16:01] Yeah, I think I mean, we touched on this before, but historically warfare has been very traditional and I think now for the first time, obviously governments are doing what they can and one to in order to respond. But I think for the first time, you know, in this capitalist society that we have, we're actually seeing corporates and leaders being out of step up and respond as well. And in the world that we have today, very globalised, very interconnected, that can have enormous impacts. I think a really interesting aspect that I have been reading about a lot is lack. Are corporates and ladies doing some of these things? Is it PR or is it, I guess, maybe genuine and I guess is true for like two parts of this, right? Because yes, obviously companies want to be seen to be doing the right thing and they want to have this image that you know, everyone is supportive of. But I guess on the flip side, we've just talked about what's happened in Russia. We've got interest rates up 20 per cent of the value of the currency has completely gone down. So actually the practical side of doing business in Russia right now, when it's really hard to get money in and out, you've got all your big accounting firms have shut down operations there. So you know, if you're running a business there, how do you audit your business? I think the practical implications of actually conducting business in Russia has become extremely difficult, which means that yes, there is the PR aspect, but there's also just the practicalities of it. 

Sophie: [00:17:31] Yeah. And I wonder if there's also the aspect of like if you're a company and you know that there's probably a huge portion of the Russian population that doesn't support this war, it's based off one very egocentric character, you know, just shutting down a restaurant impact him? Or does it impact the population in an unfair way? 

Maddy: [00:17:49] Yeah, I think I want to touch on that more. Is it impacting Russia or the Russian people? But I think let's talk about what some have some of the companies have been doing and then we can frame it. So companies that have made big moves, 

Sophie: [00:18:04] if you Google this, the list is actually endless and it falls under every single category of company that there is or industry. I think one of 

Maddy: [00:18:11] the most interesting things as well, and I think we should try and limit it to corporates for the purpose of today's investing conversation. But it's even so fast spread is like F1 is no longer conducting their races in Russia. You've got stuff happening in soccer, like it's completely unbelievable and amazing how widespread the changes have been. 

Sophie: [00:18:32] So some of the companies that I have seen that have kind of stopped services, which I find, you know, interesting. And then when you think about the context of being in Russia, you know, you can no longer stream on Netflix. You can no longer stream on Spotify. If you go to the cinema, you cannot see a Disney movie. If you want to book an Airbnb and you need a place to stay, you cannot book an Airbnb. And then it also flows onto the other effects of, you know, plane companies like Airbus and Boeing. They're actually stopping the production and supply of aeroplane parts. Same with a lot of companies like Toyota, Ford and Volkswagen. So it's kind of saying this like monumental shut down of services that people use every day. 

Maddy: [00:19:10] We did a post on our Instagram about Airbnb me, and I think the flip side of this is actually being able to say what the incredible work that countries are doing as well to support Ukraine. And we saw that people were using ever. And this is so heartwarming. People were using Airbnb to book accommodation in Ukraine that they weren't planning on going to, but as a way to actually, I guess, feed money to pay into people in Ukraine and people stuck there. 

Sophie: [00:19:35] Other companies that we've seen that have shut down is like even in the consumer staples like the restaurant industries, McDonald's is a really good example. They have eight hundred and fifty restaurants in Russia and. They shut down all of their operations because of a push from a very large retail investor in McDonald's to do so. So again, when we were chatting about the fact that we kind of like as investors have power here, that's a really clear example of how a shareholder can actually influence the decisions of a company. 

Maddy: [00:20:03] I think this is a good time to touch on that. Is this affecting Russia or the Russian people? Because you can say how where companies are limiting or punishing oil and gas and things like that, that that impacts Putin. And you can kind of, you know, you can say that link. But I think where it gets a little bit more convoluted is this story of McDonald's, for example, where it's like McDonald's is giving food to Russian people. And, you know, like you said, we have got one person, Putin and people around him who might be supporting what's going on. But there's a whole lot of people in this country, too, and it's kind of hard to draw the line or distinguish between what is impacting Putin and what's going to have an impact, like what's going to discourage what's going on at the moment vs. what's just straight up impacting the Russian people? 

Sophie: [00:20:56] Yeah, and it is a really fine line. I mean, Sasha before gave the analogy of, you know, Russia being quite isolated and even companies like, for example, Visa, MasterCard, Amex stopping their services, it actually means that nothing can almost be bought online. And then if nothing can be bought with inside the country, like it's just this almost dramatic, really dramatic and really fast effect on the Russian people, which doesn't necessarily happen in traditional warfare when you have governments against governments, rather than bringing this element of the corporate having so much power. 

Maddy: [00:21:28] Yeah, it's definitely a new age of warfare. I think one thing that I read about, which I really want to touch on is I think it's incredibly interesting as we think about companies like Apple who have come out and said they're no longer going to sell their products in Russia. And I was writing this thing that was talking about, Well, if Apple is no longer going to sell iPhones in Russia, what phones are people going to use? And it was this idea of, well, maybe this is a really interesting opportunity for China to come in because if all of these Western countries are moving their products from the country, well, it's going to be replaced by someone. And I think China has been very careful about how they've talked about the conflict going on and that they haven't actually directly condemned Russia. 

Sophie: [00:22:15] It is a really interesting argument because we've always depended on the West for a lot of our products and services, and this could be a potential, I guess, geopolitical shift that we haven't seen in a very long time. 

Maddy: [00:22:28] So I guess by talking about China, it's like shifting to what is the broader impact on the stock market and what are we going to see going forward? 

Sophie: [00:22:37] I think this is so interesting because as we've already mentioned that when there's such political unrest and uncertainty, we're always going to see negative impacts of the stock market and people are asking, you know, is this a good time to buy because it's a dip? But is it going to last a long time? And unfortunately, the uncertainty is kind of unknown with this stuff. So I think one I think there's many ways to think about this, and one of them is that like broader aspects, that there's uncertainty. Another aspect that I'm really thinking about is, you know, we've just spoken about how corporations are pulling out of China. And I think it's really interesting to watch how particular stock prices are changing and if they will change depending on their response to the Russian situation. If you have a company that doesn't actually condemn what they're doing, are you going to see a rise in their stock price because they're still keeping their revenues going in Russia? Or you're going to see a fall in their stock price because investors are going to sell off because they don't align with what they're doing? 

Maddy: [00:23:33] How are you thinking about investing at the moment, like speaking personal now? Like, are you still buying at the moment or are you pausing? How are you feeling about it all? 

Sophie: [00:23:42] I am still buying because, you know, we always talk about the fact that we really need to have a routine. Well, it works for us to have a routine to invest consistently. And I think at the end of the day, there's been many political events that have happened in the past, and the stock market does recover. It's just this uncertain period. So I'm still dollar cost averaging in. I'm moving more into the ETF space because I feel like it's a bit more of a safer space for me at the moment. But on the same token, if you've got a lot of conviction in a company that you've invested in the past or it's something new that you're looking at, it is also potentially a good buying opportunity whilst the price has fallen. 

Maddy: [00:24:19] Yeah, I think about how often when I'm looking at stock prices, how much I go back to March 2020 and I look at the price and I'm like, Wow, so low at that point and look how far it's come since then. So I personally learnt a lot from investing throughout Covid when there was quite a lot of uncertainty because even though my portfolio is down a little bit at the moment, I still have made overall quite a bit of my. And I think it's because of that Covid period, I got in when I started investing then, so I averaged in a lot over that period where the stock market was lower. I'm really trying to remember that now there's a lot of uncertainty and like, it's nowhere near as much fun when I'm going into my portfolio and everything's red. But I'm going all in on ETFs. I'm trying to stay as consistent as possible in the hope that over time, we'll see the same recovery that we've seen historically with stuff like this, and it will pay off in the long run. 

Sophie: [00:25:16] But I did want to mention that like feeling really uncertain and uncomfortable during this time is like so normal. I even feel it as well, like when my paycheque comes in, that's when I usually invest. And I've had a bit of hesitation over the past couple of months because it is really, I guess, is a huge psychological effect. When you can see money going down and you're going on putting an end to something that might keep going down. But that's why during these periods, if you don't feel as comfortable, you can always alter your attain a little bit just to make it fit into how you're feeling like. I just wanted to say that I feel like it's really normal. You know, it's like, really easy to come on my back and say, like, Oh yeah, you should still invest. But like, we all were feeling kind of uncomfortable with the situation at the moment. So I guess during a time like this, we all really want to stay informed. Mads, what are some of the resources that you're using at the moment to, I guess, stay on top of like the latest news? [00:26:07][50.3]

Maddy: [00:26:08] Yeah, the daily by The New York Times has been releasing, I mean, some pretty moving and heart wrenching, but extremely informative episodes. I'm listening to that religiously every day because I think finding it's really keeping me up to date. Also, one of our favourite podcasts after news briefing has got some really interesting information on, I guess, kind of what we touched on today, like the financial impacts of what's going on in the broader economic impacts of what's going on and how it's affecting Europe. The US, which I mean by Association Australia, they're not really talking about Australia, but that's okay. 

Sophie: [00:26:45] And sash, I know that you always bring new recommendations even to us. What are some of the things that you're listening to or even reading that are helping you stay informed? 

Sascha: [00:26:54] Yeah. Well, I'll give a couple. First of all, I've been listening to the BBC World Service because I think the daily is excellent. I listen to that as well, but it's great to have kind of the other side of the ocean's perspective on on this and because they are quite different culturally the way that the UK Covid things as opposed to the US. I'm going to give a little plug to Equity Mates and say, Go listen to the Bill Browder episode with the guys and then go read Red Notice. I think if you really want to get, I know is just finished it and we were talking about it in the left before. But I think if you really want an understanding of Putin and Russia, that's a really good book to read and then a bit of a bit of a left hand turn. But I've been listening to the Pivot podcast with Scott Galloway and Kara Swisher, and they just have a really interesting perspective on what you guys are talking about with the corporate responsibility and how capitalism can be used to change minds as well. So I think that one's not necessarily Russia focussed, but there's been some really interesting conversations about what you guys were talking about just then. 

Sophie: [00:28:04] We will also make all of this information available on our Facebook group. We'll put together a bit of a list and we'll also be putting a link there where you can donate if you do want to support Ukraine during this time, 

Maddy: [00:28:18] we would love to also hear what resources you are using and what you are finding. Help also plays jump in our Facebook group and join the conversation that we're always wanting to, I guess, expand our resources. 

Sophie: [00:28:31] That's why, say, investing podcast discussion group. You can also join us on Instagram at YIGC podcast, 

Maddy: [00:28:39] and we will catch you next week. Bye.