Usually I open these bulletins in an upbeat mood, but this is clearly no time for levity. Against the world’s hopes and expectations, Russia has launched a broad assault on Ukraine. Previous thinking that Putin would not dare an outright invasion of its neighbour due to the likely cost of lives of Russian soldiers and economic hardship for Russian society, have proved unfounded.
It's a military crisis not seen for decades with worrying possibilities and our hearts and thoughts go out to those in Ukraine and their families.
As mentioned in previous bulletins, when touching on subjects such as this, the emotional and philosophical elements are beyond the scope of this blog. Instead, with news agencies going into overdrive and markets responding in a volatile manner, I’m writing this special bulletin to provide a purely financial perspective on what you can expect as investors.
Vladimir Putin’s commencement of an invasion of Ukraine marks the return of large scale conflict in Europe after 50 years of relatively peaceful cooperation. The Western nations are now facing up to the reality that dependency on fossil fuels – much of which is supplied by Russia - has left them vulnerable. This, combined with fractious politics and division, has emboldened Russia to attack their neighbour and no amount of economic sanctions have been able to prevent this.
As a consequence, Europe will not only want to end energy dependency on Russia, but also cut them off from further funding that might support any more territorial expansion aspirations. Russian aggression is likely to provide European policymakers with the public support necessary to significantly ramp up government investment in green energy, through regulatory change and fiscal support. This could well lead to a reversal of the reduced fiscal support expected in the post-pandemic environment, especially in Europe. From an economic and markets perspective, a policy move in this direction, has the potential to provide a significant catalyst for growth over the next three to five years.
Turning to the more immediate impact of Russia’s actions on capital markets, it is worth noting that while significant, market activity this year has arguably been driven more by the prospect of central banks reducing economic support measures and raising interest rates. This headwind is now likely to ease. The impact of the significant western sanctions on Russia, has the potential to slow growth prospects, which in turn may allay concerns of an overheating economy in the US and Europe. Just as the door to economic support measures appeared to be closing, it may well be swung wide once more.
In the meantime, we are likely to feel the impact of economic sanctions and the cutting of ties with Russia in a number of ways. The energy sector, already having seen a sharp rise in prices over the past 12 months, is likely to again see further upwards pressure. We can all expect our energy bills to become more expensive on a per-unit basis, though fortunately the arrival of spring is likely to provide relief, as the cold weather recedes and we rely less on our central heating. Fuel prices at the pump can be expected to climb too, with the current average of £1.50 a litre likely to drift closer to £1.75. In the US at least, the immediate energy and fuel impact is likely to be lower given their own domestic production and reserves, but in UK and Europe, the sting of rising fuel costs will be felt by businesses everywhere.
Perhaps, counterintuitively, there may be positive aspects to this. If rising energy and fuel prices impact businesses and households, then this may also reduce pressures currently stoking inflation. This, combined with the broader economic implications of events unfolding, could well dampen enthusiasm from some central banks to raise interest rates; the very thing that has been suppressing equity and bond markets so far this year.
Nevertheless, yesterday was a red day for global stockmarkets with all major indices losing ground. However, the shockwave was entirely different, and much less severe, compared to the extreme movements seen when the reality of COVID-19 measures became apparent this time two years ago. In 2020 markets came to realise that the pandemic would have an unprecedented, and entirely uncertain impact on the global economy. Russia’s war on Ukraine will have an impact on 2022 energy prices and trade with Russia, though this is far more limited and introduces less uncertainty from a world perspective than the prospect of a global virus pandemic.
After two years of successfully mobilising every part of society to overcome a common enemy in the form of a virus, directing western resources to face off the more familiar threat of a largely isolated Russia may prove far more achievable than before the pandemic. As a result, there are likely to be aspects of this terrible humanitarian event having a more positive economic and market effect than it may feel at the moment.
To speak of things in the context of investment returns during a global crisis such as this, can sometimes feel callous. However, our job as your advisers is to be the safe hand on the tiller of your investments, as for each of you they are the engine that powers your financial plan, which in turn helps you achieve your life goals.
George Osborne once spoke of ‘fixing the roof whilst the sun is shining’ and this is why we stress-test your financial plan and ensure you are in the right type of portfolio for your timeline and objectives ahead of time. This ensures that when a storm hits, your portfolio responds in the right way. For those who require more stability, cautious portfolios provide shelter when things get rough. Those with the capacity to invest with more stockmarket exposure meanwhile, can ride the waves, safe in the knowledge that short term volatility does not prohibit long term returns.
As seen during the early parts of 2020 and discussed in our last bulletin, it’s likely that we will see some 10% drop notifications being issued. These notices are an FCA requirement that are sent if a portfolio sheds more than 10% in a single quarter. Below is a summary of portfolio performance over the past twelve months, along with a snapshot over a three year period for perspective.
1 Year Performance:
3 Year Performance:
Clearly this is an evolving situation and we cannot tell what will unfold over the days and weeks to come. Rest assured however, that your long-term financial plans are unlikely to be affected and when things get rough in markets, diversified portfolios flex, before springing back into shape again when conditions improve.
I hope you’ve found this update useful and informative. 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 directly.
