By Tim Sharp
We are deeply saddened by the historic decision taken today by Russia to pursue a military invasion of the Ukraine and the humanitarian impact of these events. However, we also wanted to focus on the potential financial impact on investors as market volatility increases. Global investors have initially reacted sharply with broad Russian equity indices falling by c.35%, the price of Crude Oil exceeding $100 per barrel for the first time since 2014, and benchmark Dutch gas futures rose as much as 62%, the most since 2005[i].
After an initial sell-off in developed equity markets of up to 4% the US markets recovered during afternoon sessions to end the day up 1.49% (S&P500) and 0.63% (NASDAQ). European markets have followed suit this morning opening in positive territory buoyed by the perceived lighter than expected impact of western sanctions announced so far on energy markets although this remains ongoing.
Our approach to these types of geopolitical event is to remain invested as the resulting economic effects tend to manifest most acutely at the regional level and less so at the global level (see table below). while we have no direct exposure to Russian equities, and while markets have, at least initially, moved in unison, history would suggest that now would be perhaps the wrong time to take any evasive actions.
Indeed, we believe attempting to do so could materially affect longer term investment returns in a negative way.
Regional Market Returns Following Russian Invasion of Crimea;
Russia remains a relatively small part of the global economy (c.1.5% according to World Bank estimates) and while we do expect to see significant disruption to areas such as energy and food prices, we also feel confident that these are outcomes for which we are already positioned. The threat of greater escalation and the wider impact of financial sanctions suggest volatility will likely remain elevated over the coming days and weeks.
So far this year the rotation from growth and momentum driven stocks towards cheaper value and yield bearing sectors has continued with the S&P 500 Value and Growth Indices down 5.41% and 14.16% respectively. Barclays point out today that falling markets on higher earnings have created a de-rating in European equities that may provide opportunities once the outcome of the Ukraine crisis is more fully understood[ii].
We have always taken a diversified approach toward portfolio construction however, and recently have been focusing on fixed income and alternative investment exposures. This exercise was undertaken to maximise the extent to which these allocations could help diversify risk through periods of equity market stress.
As a result, we favour exposure to carefully chosen assets such as agricultural commodities, precious metals, GBP & JPY denominated government bonds, and a small number of actively managed and genuinely uncorrelated investment strategies. We are encouraged to see these assets having generally increased in value, providing a welcome offset to some of the weakness seen more broadly across the equity markets.
[ii] Barclays – Equity Market review – Wartime – February 25, 2022
Our investment strategy committee, which consists of seasoned strategists and investment managers, meets regularly to review asset allocation, geographical spread, sector preferences and key global market drivers and our economist produces research and views on global economies which complement this process.
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