The Long View: Russia-Ukraine War Has Lasting Implications for Investing

11 March 2022

5 min read

Chris Hogbin| Global Head—Investments

Gershon M. Distenfeld, CFA | Director—Income Strategies

When Russian president Vladimir Putin sent troops into Ukraine, he unraveled decades of efforts to cement peace in Europe after the Cold War. For investors, the new world order has shaken up broad issues that shape our analysis of asset classes and securities.

The humanitarian tragedy we are witnessing in Ukraine has shocked the world. We can no longer take for granted the peace and security that has largely prevailed in Europe since the Soviet Union collapsed over 30 years ago. Now, stock and bond investors must recalibrate their thinking about the impact of geopolitical events on global macroeconomics, and how these trends affect individual countries and companies and shape security selection. While there are still more questions than answers, here are some of the big issues our investment teams are beginning to explore.

How will Europe change?

European countries have increased their reliance on energy imports from Russia for years. Before the invasion, Russia accounted for about a third of EU and UK natural gas imports, with Germany, Italy, Hungary and Poland most exposed to a cutoff of supplies. Europe also imported about 60% of Russia’s oil, according to the International Energy Agency. Now, European countries are rethinking their energy strategies. This is likely to accelerate the push for renewables, while requiring alternative sources of fossil fuels in the short term. Meanwhile, if Russia is locked out of European markets, it may try to redirect its supplies toward China and other Asian countries.

Defense has suddenly become a European priority. For example, Germany has earmarked €100 billion in its 2022 budget to military spending—more than double its 2021 allocation—a move unparalleled in post-World War II history. Even as equity markets have tumbled amid the conflict, shares of some European defense groups surged.

Energy and defense needs are galvanizing the region. On March 9 and 10 in France, 27 EU leaders began hammering out a strategy to reduce dependency on Russian energy and to coordinate defense spending plans. Media reports suggest the EU might issue joint bonds to finance these needs. These developments are a sea change in Europe’s political and economic integration, which could have big implications for investors across asset classes.

What are the implications for commodities?

Surging prices for energy, metals and other raw materials might seem to echo trends from two decades ago. But conditions today are much different than in the 2000s, when a commodities supercycle was driven by demand. This time, it’s a supply shock.

Russia and Ukraine supply about a quarter of the world’s wheat. Fertilizer is another major Russian export. As food and fuel prices rise, emerging market countries, which are especially big importers from both Russia and Ukraine, could be vulnerable to economic scarring, social unrest and delayed fiscal consolidation. New sources of energy supply take time to come on stream. Until then, the only way to balance demand may be through prices high enough to destroy demand, possibly triggering a recession in parts of the world.

Commodity markets are just starting to digest the implications of sanctions. But, over time, these markets may look very different than today, with potentially large changes in sources of production as well as in transportation and refining capacity. We’ll also watch for accelerated investment in alternative energy sources, energy efficiency and new materials, to substitute stranded supplies in Russia and Ukraine.

Is deglobalization accelerating?

During the pandemic, supply chain disruptions threatened to dismantle decades of globalization, which was already under threat due to rising populism. Will deglobalization be hastened now that Russia is locked out of many markets? It’s too soon to say. However, we should watch export data and new project investments indicators for signals that deglobalization is gathering pace.

What happens if more companies bring production back to their home markets? Possibly more inflation, because companies won’t necessarily be manufacturing in the most efficient location. Yet repatriation could also lead to a wave in domestic investment and potentially higher wages that could boost domestic demand.

How can we manage geopolitical risk in portfolios?

From elections to war, it’s inherently challenging to assign reliable probabilities to geopolitical outcomes. Investors generally keep an eye on political trends, but fundamental analysis of stocks and corporate credit focuses more on business drivers of return and risk. The war in Ukraine and the scale of the West’s sanctions have reminded investors that low-probability, high-impact geopolitical events happen, with massive consequences for businesses and capital markets.

We may need to rethink how we apply risk premiums for major geopolitical events. In some cases, we might conclude that low-probability risks are too hard to assess and should simply be ignored by investors (which may be the right approach to truly cataclysmic events). In other cases, will potential outcomes previously thought to be low probability render some high-risk assets uninvestable, or at least subject to significantly higher risk premia?

Do we need to rethink ESG issues?

The energy crunch has prompted big questions about the global push toward net-zero carbon emissions. Even before the invasion, we believed the world needed a credible transition plan that delivered sufficient energy supply over the next decade on the road to a renewables-powered world. Those questions have now been sharpened.

Shortages in wheat and grains could prompt more production in countries like Brazil, complicating efforts to arrest Amazon deforestation. How do we balance social needs for affordable food with environmental needs in cases like these?

Will the war change the way ESG-focused investors think about defense companies? Many ESG-focused investors have shunned defense companies, but if these companies are seen as crucial to securing freedom and democracy in Ukraine, its neighbors and Europe at large, this too could change. And should the behavior of national governments be given greater weight in ESG analysis? If so, how? Grappling with these ESG-related issues will require a thoughtful approach. We will apply fundamental research and active engagement to understand all aspects of these complex issues and reach a balanced viewpoint that promotes better ESG and financial outcomes.

Amid the fog of war, it’s hard to focus clearly on how the conflict will change the world in which we live and invest. But it’s not too soon for investors to start framing the issues that will undoubtedly reshape the way we analyze countries and companies and build portfolios for years to come.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

About the Authors

Chris Hogbin

Chris Hogbin is the Global Head of Investments for AB. In this broad leadership role, he oversees all the firm’s investment activities. Hogbin is responsible for driving investment success across asset classes, fostering collaboration and sharing best practices across investment teams, as well as leveraging a common infrastructure and evaluating opportunities to invest in capabilities that deliver better outcomes for clients. He is also a member of the firm’s Leadership team and Operating Committee. Hogbin joined AB’s institutional research business in 2005 as a senior analyst covering the European food retail sector. In 2010, he was named to Institutional Investor’s All-Europe Research Team and was ranked as the #1 analyst in his sector in both 2011 and 2012. Hogbin became European director of research for the Sell Side in 2012 and was given additional responsibility for Asian research in 2016. In 2018, he was appointed COO of Equities for AB. In 2019 Hogbin was promoted to co-head of Equities, becoming head of Equities in 2020. Prior to joining the firm, he worked as a strategy consultant for the Boston Consulting Group in London, San Francisco and Shanghai, where he was responsible for the execution of critical business-improvement initiatives for clients in the financial-services and consumer sectors. He holds an MA in economics from the University of Cambridge and an MBA with distinction from Harvard Business School. He is a trustee of the Public Theater in New York.

Scott DiMaggio, CFA

Scott DiMaggio is a Senior Vice President, Head of Fixed Income and a member of the Operating Committee. As Head of Fixed Income, he is responsible for the management and strategic growth of AB’s fixed-income business and investment decisions across the department. DiMaggio has previously served as director of Global Fixed Income and continues to be a portfolio manager across numerous multi-sector and multi-currency strategies. Prior to joining AB’s Fixed Income portfolio-management team, he performed quantitative investment analysis, including asset-liability, asset-allocation, return attribution and risk analysis for the firm. Before joining the firm in 1999, DiMaggio was a risk management market analyst at Santander Investment Securities. He also held positions as a senior consultant at Ernst & Young and Andersen Consulting. DiMaggio holds a BS in business administration from the State University of New York, Albany, and an MS in finance from Baruch College. He is a member of the Global Association of Risk Professionals and a CFA charterholder. Location: New York

Gershon M. Distenfeld, CFA

Gershon Distenfeld is a Senior Vice President, Director of Income Strategies and a member of the firm’s Operating Committee. He is responsible for the portfolio management and strategic growth of AB’s income platform with almost $60B in assets under management. This includes the multiple-award-winning Global High Yield and American Income portfolios, flagship fixed-income funds on the firm’s Luxembourg-domiciled fund platform for non-US investors. Distenfeld also oversees AB’s public leveraged finance business. He joined AB in 1998 as a fixed-income business analyst and served in the following roles: high-yield trader (1999–2002), high-yield portfolio manager (2002–2006), director of High Yield (2006–2015), director of Credit (2015–2018) and co-head of Fixed Income (2018–2023). Distenfeld began his career as an operations analyst supporting Emerging Markets Debt at Lehman Brothers. He holds a BS in finance from the Sy Syms School of Business at Yeshiva University and is a CFA charterholder. Location: Nashville

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