4 Mins
It’s hard to believe it’s now almost two years since we were sharing with you our views on what was happening in markets following the outbreak of Covid-19 early in 2020.
Investors have had a lot thrown at them in the period since but those of you who didn’t panic and remained invested benefited from a sharp recovery in the value of your investment portfolios. However, we are now faced with inflation worries and can add the Russian invasion of Ukraine which, aside from the likelihood of human suffering, poses geopolitical dangers for the West.
Clearly, it is a fast-moving situation which could change very quickly but, at the time of writing, Russia’s military has launched air and missile attacks across Ukraine as well as land incursions in some areas. This followed Vladimir Putin’s formal recognition of the independence of the breakaway republics in Eastern Ukraine and their request for military support.
So far, the West has responded by imposing several targeted sanctions and Germany has halted the certification process for Nord Stream 2, the new pipeline intended to carry Russian gas to European consumers. However, much more punitive sanctions are likely to be announced in the coming days and NATO will probably reinforce its eastern flank with an increased military presence in countries like Romania, Poland, and the Baltic States.
In terms of the market response, we asked some of our trusted investment partners for commentary we can share with you.
Quilter Cheviot Investment Management are not surprised we have witnessed sharp falls in global stock markets. While commodity prices have risen significantly, oil and gas safe havens are in demand, with gold and government bond prices rising – especially inflation-linked.
Volatility is likely to continue in the coming days, though history does give us some comfort that markets should eventually look beyond these geopolitical concerns and recover. During the Crimean annexation of 2014, investors experienced some volatility, but global equities soon resumed their upward trend as the crisis subsided. Going back further, global markets had a difficult time in the run up to the US-led invasion of Iraq but bottomed about a week before the troops went in and spent the rest of the year going up steadily. And even further back, there was a big fall in markets during the Iraqi invasion of Kuwait in August 1990 when the oil price doubled but markets soon stabilised afterwards. Clearly, all geopolitical events are different and this one is serious, but we are confident that markets will bounce back once tensions subside.
Whilst it can be disconcerting to watch the value of your investments vary over the short term, history has also demonstrated that the overwhelming trend is for the value of investments to increase over the long term, with the effects of short-term volatility tending to be ‘smoothed out’, as illustrated in the graph below which shows the value of the MSCI World Index of shares between 1988 and 2022.
We are monitoring this situation closely and hearing from a range of industry experts to understand the impact as it evolves. Ultimately, we are keeping a close eye on any consequential impacts and given everything we know (while acknowledging the unknowable), it reinforces the benefits of a long-term, valuation driven approach. If anything changes, we’ll be sure to let you know, but for now we hope you find this touchpoint useful.
Our investment approach has always been to use well managed, highly diversified portfolios, invested across a variety of assets globally. Therefore, exposure to Russia and Ukraine within the investment funds we use is minimal. This diversified approach is effective to help mitigate risks and reduce impacts to your portfolio at times like these. This has proven to be the case in the past and we would expect the benefit of a diversified portfolio to be the same in the current situation.
For those of you who would want some more information please follow the link below where you will find updates from another two of our investment partners SEI and Blackrock.
Please note, clients may receive communication directly from their discretionary investment manager if their portfolio drops by 10% or more if they use this service.
As always, please don’t hesitate to contact us if you have any questions or issues.
Kind regards,
Jim Wilson, Managing Director