Economically and Financially, Russia Doesn’t Matter As Much As You Might Think

Posted by lplresearch

Thursday, March 3, 2022

With all eyes on the war in Ukraine, we continue to pray for the safety of the Ukrainian people and the sovereignty of their nation. It’s a tough time to talk economics and markets, but that’s what you come here for so we’ll continue to do our best to help investors make the best possible decisions during these difficult and uncertain times.

Today we wanted to highlight three basic but important points. First, the U.S. economy has negligible direct exposure to the Russian economy. Second, the weakness in the Russian stock market has minimal impact on the MSCI Emerging Markets Index. And third, some domestic sectors have more international exposure than others, which should be factored into sector allocation decisions given rising recession risk in Europe.

But first, we focus on the direct impact of Russia on the United States economy. The amount of trade between Russia and the United States is negligible, as you can see in our LPL Chart of the Day. The U.S. imports almost nothing from Russia (or Ukraine, for that matter). We estimate that the percentage of revenue generated by S&P 500 companies in Russia is even lower. This doesn’t dismiss the fact that high oil prices will take a bite out of consumers’ pocketbooks, which we will discuss in a future post.

View enlarged chart.

Next, the impact of the collapse of the Russian equity market will be minimal on the emerging market equities universe. The allocation to Russia in the MSCI Emerging Markets (EM) is just 1.47% and, therefore, should not dissuade investors from allocations to that asset class, in our view (note that MSCI plans to drop Russia from its indexes so it looks like this number may effectively go to zero).

View enlarged chart.

“Europe overall, including Russia, Poland, Hungary, and Turkey, makes up only about 3% of the MSCI Emerging Markets Index,” according to LPL Financial Equity Strategist Jeffrey Buchbinder. “That means Asia, notably China, Taiwan, India, and Korea, will continue to drive the direction of emerging market equities and Russia’s economic and financial hardship is not enough of a reason to sell.”

Our EM equities view remains neutral, while we are becoming increasingly cautious on the European equity markets within the international developed market universe. The continent’s heavy reliance on Russian energy exports is concerning and, in fact, Germany may be headed into recession. For EM, key risks remain China’s economic slowdown and regulatory crackdown, as well as tightening monetary policy globally. And don’t forget the markets of big commodity producers in the EM universe such as Brazil, Saudi Arabia, and South Africa, are thriving in this environment.

Finally, given the increasing risk of economic weakness throughout Europe, we highlight the sectors in the U.S. market that have the most international exposure. High energy costs sparked by the Russia-Ukraine war and subsequent sanctions introduce significant economic risk to Europe, which could take some of the juice out of a potential rebound for the U.S. technology sector, the most global of all S&P 500 sectors. On the flip side, utilities are well insulated with virtually no exposure to international markets and are generally able to pass along higher natural gas prices. See the chart below for international revenue exposure by S&P 500 sector.

View enlarged chart.


This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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