Our aim in this article is to assess the relationship between uncertainty and investments from a macroeconomic perspective, mainly for the case of the European and United States economy. It may be that the relationship between investments and uncertainty may not always follow the general anecdotal temporal principles of positive and negative correlations depending on the source of uncertainty. 

This is an important finding that provides evidence that the relationship between investment and uncertainty is rather complex, time-dependent, and driven by economic cycles. Furthermore, we can reveal that governmental investments exhibit a countercyclical behavior, whereas a pro-cyclical behavior is observed for private investments. This differential behavior is informative of a significant substitution crowding-out effect between these different instruments. 

Politicians and international institutions make decisions that alter the way through which economies operate and interact. This is particularly topical in the light of any recession and financial crisis caused by tensions, conflicts, or pandemics. Or the European sovereign debt crisis and the rising United States fiscal deficit, when politicians assumed a bold role in stabilizing and shaping the world economy. 

In this regard, there is a significant degree of uncertainty as to what tools can be used by policy makers and institutions, what impact these decisions will have on the economy and how timely they will be. 

Evidence suggests that when faced with such uncertainty, corporations, in particular both the European and the United States, choose to reduce capital investment.

What are the Effects of Ukrainian Crisis On Financial Market

Any conflict between two supply countries, such as the conflict between Ukraine and Russia, has the potential of delivering a double blow on the global economy, affecting consumer and business confidence. Worst, the tension between Ukraine and Russia simultaneously inflicted additional damage to already the negative impacts caused by the COVID-19 and strong inflationary pressures. 

The investors were expecting recovery from the COVID-19 pandemic. Unfortunately,  tension has created additional decreases in global investment and shortages of some products as Russia provides the European countries with 40 percent of its oil products and coal and a fifth of its natural gas. It is the world’s biggest exporter of fertilizers and the palladium used by the auto industry in catalytic converters.

However, that is the case; Russia is a big landmass with a small economy. For instance, its GDP is smaller than Italy’s, and it can have an impact disproportionate to its size. Indeed, the impact of the tension between Moscow and Kyiv has been felt by increases in oil prices across the world. 

What are the Uncertainty Risk Factors

As the stock market swings amid the Ukrainian Russian conflict, you might get nervous about the effects on your stocks, cryptocurrencies or other investments. But history has proven that a shaky market is no reason to stray from your financial plan.

Investors’ behavior at the end of 2008 is an example. Back then, as the market soured in the final months of the year, investors pulled funds to mitigate losses, but not nearly enough to avoid the losses. Some investors then exacerbated the losses because they were out of the market for the subsequent recovery.

There are several macroeconomic factors impacting today’s market uncertainty. It appears more than the COVID-19, and the tension over Ukraine has created uncertainty, though it’s clear what the potential economic fallout of its looming bankruptcy is. Clearly, the investor must be aware that the European Countries and United States economy will not be shielded from any fallout.

Additionally, the United States Federal Reserve still continues holding an overnight lending rate of zero percent for the near future. But the rates will surely increase eventually. There’s no clear direction on when the Federal Reserve will begin tapering the 80 billion USD of Treasury securities and 40 billion USD of mortgage-backed securities purchased each month.

What are Opportunities During Uncertainty Situation

Can investors find investment opportunities during uncertainty? In general, the answer is yes. An investor must be aware that while some assets decrease slightly than others, it is a good period to invest when the value of assets decrease during an uncertainty.

 However, it is important to invest in an asset that can emerge from the uncertainty period, more valuable. So let us examine which asset maybe good for investors during this difficult time.

Starting with stocks, both health care and consumer products are sectors that necessitate spending. Therefore, for some, they are the best investment opportunities both during and after uncertainty, regardless of economic conditions. They are typically performing well during uncertainty. For instance, during the COVID-19 crisis that caused the 2020 financial crash, the S&P 500 had an annual loss of 11.2 percent by May 2020. Over the same period, the consumer staples category was down 8.6 percent, and health care was down only 2.1 percent. 

Intelligent investors should seek an investment that has the ability to increase its value after or during the uncertainty. While small-cap stocks generally rule when the recession ends, they are historically hit hard than the health and consumer sector during economic downturns. 

Unfortunately, the result is different when investors are most interested in dividend yields. As companies look to reduce risk and preserve cash during uncertainty, they tend to decrease or eliminate dividends. For instance, during the COVID-19 uncertainty, dividends decreased 42.5 billion USD in the United States alone in the second quarter of 2020. These dividends declines are considered the largest annual decline since the financial crisis of 2008.

Also, the value of fixed-income investments has also been stable during recessions. For instance, most major bond indexes performed well compared to the S&P 500 during the 2008 financial crisis. From 2008 to 2009, the Bloomberg Barclays Corporate Bond, Treasury Bond, United States Aggregate, and Municipal Bond indices recorded positive returns.

Alternative Opportunities During Uncertainty

Additional to financial investment, alternative investments have proven to be an interesting diversification hedge against uncertainty periods. For instance, investors should approach investments in crops, metals, and other tangible goods when expecting uncertainty. These tangible assets are inversely related to traditional investments. One investment opportunity to hedge against uncertainty is silver. In 2008, the value of silver stood at 14.76 USD per ounce. Though the price fluctuated during the uncertainty, the price of silver decreased only to 13.94 USD per ounce at the end of the financial crisis of 2008. 

Precious metals have also proven to be solid investments coming out of economic downturns. For instance, between 2010 and 2011, the value of gold increased to 50.6 USD. However, it’s important to remember that not all physical goods are good investments to hedge against recessions or uncertainty. One example is crude oil, as the price of a barrel of crude oil dropped from 133.88 USD to 39.09 USD during the financial report of 2009. However, the oil price increases during the Ukraine Russian conflict

To hedge against uncertainty, other investment opportunities are lands or particularly farm-lands. Historically, land has a negative correlation to stocks and bonds. Farm-land continues to experience an increase in its value throughout the past year due to an increase in food demands and therefore rising food prices during economic uncertainty.

For instance, from 1995 through 2019, farm-land in the United States had annual returns of 11.51 Percent, while the standard deviation was 7.08 percent. When compared with other investments, farm-land had higher returns during previous market downturns. For instance, the asset returned an average annual income of 5.3 percent during the dot-com recession of 2000-2002, 15.8 percent during the financial crisis of 2008, and 6.7 percent during the economic slowdown in 2018.

Investors must be financially literate to research and evaluate the market to hedge against uncertainty.During the financial crisis of 2008, investors who stayed the course during the crisis were gained income in the decade following the crash. For instance, the Dow had dropped to 6,547 points in 2009, but it soared to highs by 2018, when it closed at more than 26,000 points. 

The S&P 500 index quadrupled during the bull run, from its low of 676 points in March 2009 to as high as 2,872 points in January 2018. The intelligent investor will remain calm and even invest more in value assets during any uncertainty period.

If you are an intelligent investor who invests for future gain, then what is happening in the market now shouldn’t matter to you. The lesson from the financial crisis of 2009 taught us that never withdraw your investment during uncertainty or when the market is down.

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