There is no question that what we have witnessed over the previous weeks in Ukraine has developed into one of the largest humanitarian crises experienced in the western world for decades, with the latest reports suggesting more than two million people have so far left Ukraine due to the Russian invasion whilst the EU have warned that as many as five million could be forced to flee if the situation continues to escalate.
As mentioned previously, when touching on subjects in this area, the emotional and philosophical elements of this crisis are beyond the scope of these bulletins. Instead, we continue to focus on the financial implications. This bulletin is to update you on what impact the crisis has had so far on investment markets, and in particular, your own investments.
What exposure does my portfolio have to Russia?
When Russian troops crossed the border into Ukraine on February 24th, not only did this begin the largest land invasion in Europe since 1939, but this also shifted the landscape of stock market investments quickly, as governments turned their attention to increasingly tough economic sanctions. As a result, the Russian Ruble has crumbled and the Russian stock exchange called the MOEX (Moscow Exchange), has lost more than $150 billion in value since the New Year.
Longer term, these economic sanctions will take their toll on the Russian economy and some experts foresee a 50-year period of recovery for the Kremlin. The western world has restricted the importation of Russian natural resources, including gas and oil, which makes up Russia’s largest source of income, whilst day to day businesses such as Ikea, Starbucks and McDonalds have closed all retail outlets in Russia, which will further reduce Russian taxation revenues going forwards. As a result, the Central Bank of Russia has increased interest rates to 20% as an emergency measure to improve deposit rates for local citizens facing massive levels of inflationary pressure.
With sanctions already having dire consequences for the Russian economy, we want to reassure you that this has no direct impact on the performance of your investments. Even before this crisis, Tatton portfolios held minimal exposure to the Russian stock market, representing between 0.1% to 0.5% of their make-up overall. Since that time, the decision was made to update portfolios further, to remove any remaining direct exposure to Russian assets. It is therefore the impact that the conflict and economic sanctions is having on the rest of the world economy – not events unfolding in Russia itself - that is driving investment performance at this time.
How global stock markets have reacted over the last few weeks?
Stock markets do not like uncertainty and whether political, economic or humanitarian, large-scale uncertainty will continue to cause short-term market volatility. In the modern world, we are all globally connected and as a result the uncertain outcome of the Ukrainian conflict is being felt in markets all over the world as imports, exports and trade deals are impacted. When reviewing the performance of portfolios, it is easy to dwell on the short-term impact. However, as your financial advisers, we are here to help you achieve your long-term objectives, so view investment performance in this context. Stepping back and looking at the broader picture over a number of years can help put short term performance into greater perspective.
1 Year Performance:
3 Year Performance:
In the short term, whilst they have lost significant ground so far this year, all but one of our portfolios remains positive over a 1-year period. Considering performance over the last three years meanwhile, portfolios have still delivered strong returns, despite a severe market crash occurring during this period. Whilst we cannot tell what the future holds and where this crisis will head next, one thing we do know is that globally diversified portfolios have the ability to bounce back from periods of significant volatility such as those we experienced in March 2020 from Covid-19. Often the years that follow sharp downturns, represent the best years of portfolio performance, once conditions improve and confidence in markets return.
What happens next in eastern Europe is far from clear; however, the sooner the threat of a larger scale European or World War passes, the quicker portfolios will return to normal levels of volatility. At the moment, all portfolios are experiencing volatility as uncertainty continues. Those of you in the more aggressive portfolios will naturally have seen more of an impact in recent weeks and those of you invested in the most aggressive Global Equity portfolio, will have received a 10% drop notification recently. It is precisely this exposure to volatility that drives the long-term performance of more growth-focussed portfolios, as market rises are also just volatility, albeit on the upside as opposed to the downside.
How stock markets have reacted in the past
No-one knows exactly how this story will end, or what the impact will be on investment markets in the short-term. It is interesting however to look to the past, to help us understand what may happen in the future, by looking at the impact that previous conflicts have had on markets.
The graph below shows a number of geopolitical events in the past and the impact that they had on the US stock market as an example. On average, the number of days to recover from the bottom of the stock market back to previous levels is 47 days once the conflict ends, but this varies understandably depending on the situation:
As your financial advisers, we regularly review your circumstances to ensure you are positioned in a well-diversified portfolio that suits your goals and timelines. This means that you would have already been in the right portfolio for your circumstances before the Ukrainian conflict began. Rest assured that your longer-term financial plans are unlikely to be impacted, as we stress test your financial plan at each annual review, to ensure you remain on track to meet your objectives.
I hope you’ve found this update useful. We will continue to monitor the situation and provide periodic updates as things develop, however, if you have any questions in the meantime, please do not hesitate to get in touch.
Kind Regards
Joshua Underwood MSc
Financial Planner
