Geopolitical events like military or economic conflicts can affect stock markets in many ways. These events are normally widely followed by investors. We believe current market prices quickly incorporate expectations about the effects of these events on economies and companies. Our investment approach centers on using information in current market prices rather than trying to outguess them. If markets stay open and continue to function normally, we generally continue investing our portfolios according to our usual process. We believe that the most effective way to mitigate the risk of unexpected events is through broad diversification and a flexible investment process. This philosophy applies to other crises, like natural disasters, social unrest, and pandemics.
However, geopolitical events sometimes lead to restrictions on investors’ ability to trade in specific stocks or on certain exchanges. One way is through government sanctions. In recent days, the US and other Western governments have issued sweeping new sanctions directed at Russia. Our Portfolio Management and Compliance teams are actively monitoring this rapidly evolving situation. We previously reduced the weight of Russia in our emerging markets and global equity portfolios after sanctions were imposed in 2014 after the annexation of Crimea. In January 2022, we halted further purchases of Russian stocks in response to rising risks of sanctions on Russia from the United States and other nations. We are not currently buying Russian shares, including depositary receipts with exposure to Russia, and we are evaluating the suitability of Russian securities for our portfolios. Russian ruble-denominated bonds and Russian issuers have never been eligible for Dimensional’s fixed income portfolios.
As of February 28, 2022, Russian equities represented from 0.07% to 0.42% of our US-domiciled emerging markets equity mutual funds and ETFs, compared to 1.59% in the MSCI Emerging Markets Index.1
In another recent example of government sanctions, the US issued executive orders in 2020 and 2021 that prohibited US persons from investing in certain Chinese companies. The weeks and months after the original order took effect in November 2020 were a period marked by uncertainty, as fund managers sought clarity on the scope of the restrictions and the exact list of sanctioned stocks.
In some cases, geopolitical events have led to temporary market closures, impacting all stocks in a certain market for a period of time. For example, on June 27, 2015, Greece closed its stock market after defaulting on its government debt. The Athens Stock Exchange stayed closed until August 3 of that year. During the Egyptian revolution of 2011, the Egyptian Stock Exchange closed after January 27 and remained closed for over a month. Unplanned market closures are not limited to emerging markets. In 2019, the Tokyo Stock Exchange closed for 10 days after Japanese Emperor Akihito abdicated the Chrysanthemum Throne. In 2001, the New York Stock Exchange closed until September 17 after the September 11 attacks on the World Trade Center.
These types of market disruptions are not new, and the form that they take can vary. We’ve seen other examples over the decades during which we have managed portfolios, including currency repatriation restrictions in Malaysia in 1997, the introduction of capital controls in Argentina in 1999, and a successful coup d’état in Thailand that led to a market closure in 2006.