Many of our customers are understandably worried about the current conflict between Russia and Ukraine. Our thoughts are with all of those who are directly affected, and we sincerely hope for a quick and peaceful conclusion.
We are keeping on top of the situation as it is unfolding and doing everything we can to limit the impact on your investments. There are several other factors contributing to the fall in performance in 2022, with markets still being impacted by lingering Covid-19 uncertainty and ongoing inflationary pressures.
What’s happening with Russia and Ukraine?
Russia and Ukraine have been in conflict for 8 years, with recent tensions running high.
On Thursday, 24th February, Russia attacked several major cities across Ukraine. These actions have forced Western countries to act through coordinated sanctions that have been designed to damage the Russian economy and the finances of influential Russian citizens. We’d already seen sanctions tightened earlier this week, targeting Russian banks and individuals by restricting access to Western financial markets.
In addition to these sanctions, Germany has suspended progress on the Nord Stream 2, a gas pipeline that transports natural gas from the Russia to Germany. This has caused oil and gas prices, which are already high, to climb even further and put more pressure on central banks to raise interest rates to help tackle inflationary concerns.
It is important to note that while Russia and Ukraine are less than 3% of global GDP, Russia is the second largest natural gas producer and third largest oil producer[1]. Furthermore, Ukraine is the fifth largest wheat exporter and Russia is the largest[2] – which is crucial for food prices, particularly in Emerging Markets.
It seems likely that there will be more economic sanctions imposed against Russia, rather than any direct military action by NATO or Western governments.
However, there are several immediate problems that the West will need to face, especially regarding reliance on oil and gas. Europe is highly dependent on Russian gas, as it supplies around 40% of Europe’s needs[3] .
The Gas Exporting Countries Forum has stated that if Russia is not able to export gas, then they would not be able to cover the shortfall.[4] There is a risk that this conflict could spill over into one of Ukraine’s NATO member neighbours (Poland, Slovakia, Hungary, or Romania). However, we anticipate that the current short-term negative volatility will ultimately be contained.
What about markets?
Historically, when geopolitical events happen suddenly, they tend to spark a knee-jerk market reaction, before going on to recover from the unexpected volatility. This is especially true for stock markets, as the increased uncertainty drives investors to sell which can bring the price down lower. However, by holding onto your investments, these losses won’t become real, and the value may return with time.
At the same time, given the uncertainty of the situation, we are not looking to add any more weighting to stocks in our Plans at the moment. If the outlook becomes clearer and an opportunity arises, then we will take steps to act on it.
Our current outlook
In times like this, it is important to reflect on economic fundamentals. Firstly, global growth is broadly above trend, and likely to be supported as Covid restrictions begin to be lifted. Secondly, company earnings have proved largely robust despite inflationary pressures. Thirdly, while central banks are increasing interest rates, they are not anticipated to be as aggressive as we’ve seen in the past.
Also, while expectations are the key driver of market prices, we are not convinced that the market’s core expectations of a rushed return of UK and US central bank interest rates to close to 2.00% by the end of this year will materialise.
There is potential that the rise in interest rates will be lower than expected, which would be good news for both the stock markets and bonds, unless there was concern about a recession. However, a recession would be unlikely in the short or medium term, thanks to good company earnings and balance sheets, combined with a strong labour market and high consumer spending.
We appreciate that it has been a bumpy start to the year for many investors, but it could pay off to focus on your long-term objectives and ignore short term volatility.
1. www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy/country-and-regional-insights/russia.html
2. https://www.fao.org/
3. https://www.reuters.com/business/energy/what-are-europes-options-case-russian-gas-disruption-2022-02-15/)
4. https://www.aljazeera.com/news/2022/2/22/what-was-said-at-gas-exporting-countries-forum
