Ukraine crisis: for investors, things may well be different this time

You don’t often lose all your money in an equity market. Every year Credit Suisse publishes its Global Investment Returns Yearbook, and in doing so remind us just how well things usually go.

Credit Suisse’s database covers the returns on stocks and bonds for 35 countries; the results are mostly cheering. For example, since 1900 the US stockmarket has given an annualised real return of 6.7% and the rest of the world has returned a perfectly acceptable 4.5%.

In two cases, though, they aren’t particularly cheering: in Russia in 1917 and China in 1949 investors suffered “total losses” after Communist revolutions. Both markets reopened in the 1990s; there were no refunds.

The last week, with the Russian invasion of Ukraine, has not been quite on the same scale — but the 33% fall in Russia’s Moex stockmarket index on Thursday was a sharp reminder of the risk that comes with investing. It should also be a reminder of the extent to which uncertainty drives equity prices.

There is endless guff talked about equity valuation, but at its heart it is very simple: a share is worth your forecast of what the total income from it will be over time, discounted for inflation and then discounted again for the extent to which you might be wrong.

The number you are prepared to pay should be nothing more than the sum of the dividends you expect to receive, adjusted for uncertainty. The more confusing the future looks for any particular stock or market, the less you should pay.

Every complicated model you see that looks like it is about something else is actually nothing more than an attempt to get a handle on the likely scale and timing of the income you can expect. That’s it.

So what about Russian equities? They are now, by any measure, cheap. Prices are moving around too fast to be precise, but think a price/earnings ratio of three to four times and a dividend yield of 10%. But they also come with absolute uncertainty — we have no idea quite what the various sanctions currently being announced around the world will end up doing to the earnings bit of the price/earnings equation. For now, that means buying them is not an investment but a speculation.

However, it isn’t just the Russian market that should be worth less as a result of its invasion of Ukraine — pretty much all stockmarkets now have a new overlay of intense uncertainty. The big fund-management PR machine has been pretty active over the past few days, telling us to buy on the sound of cannon and noting that markets have easily brushed off many of the nasty global events of the past few years.

Take the withdrawal from Afghanistan, the North Korean missile crisis and the 2017 bombing of Syria, said one manager: in all cases the market reaction was “surprisingly mild”. Buying the dip was the right thing to do.

It probably won’t be this time because of inflation and the extreme levels of uncertainty it introduces into future income calculations. Ukraine is the world’s biggest exporter of sunflower oil, the second-largest producer of barley and the fourth-largest producer of potatoes; it is also rich in metals and minerals. Add in Russia’s dominance over key strategic metals and you can see the potential for a nasty inflation shock.

• This article was first published in the Financial Times