28 February 2022 - Ukraine invasion and the impact on investments
We wanted to reach out to you to reassure about your investments and explain market responses to the current situation in Ukraine.
History suggests it is rarely a good idea to drastically change investment strategy on the back of geopolitical tension, and we do not see this time as being any different.
Our investment partners approach favours broadly diversified, multi-asset investing in line with clients’ risk profiles. This means our partners are not heavily exposed to the outcome of any one binary event such as the current conflict. Rather, they look through to the fundamentals of continued global economic recovery and growth, a decent earnings outlook, confident consumers with pent-up savings to spend and valuations that do not look particularly demanding.
Below we go into further detail to help explain.
Diversification remains fundamental
Our investment partners have specifically designed multi-asset portfolios to respond to market volatility in ways that will shield investors from the worst of any major bouts of selling in specific asset classes.
For example, they own government bonds, including UK Gilts and US Treasuries, that rose in price as equity markets fell. These financial securities act as ‘safe-haven’ assets in times of geopolitical conflict. Owning investments that are uncorrelated to other asset classes can help limit the ‘downside’ moves experienced by multi-asset portfolios during times like this.
On a more positive note, ‘Alternative’ funds incorporated within most of the portfolios include infrastructure and renewable energy assets and our partners are confident they will still produce attractive cash flows for investors’ amidst the current market volatility.
Market reaction to Putin’s actions
The most acute sell-off in global markets, unsurprisingly, centred on Russia. The country’s major stock index was down more than 40% after Putin’s initial announcement. Investment Managers see this market as being the significant underperformer against major peers as punitive sanctions from the West are imposed in retaliation to Russia’s advances. Outside of a limited exposure in the Emerging Markets funds, we do not invest specifically in Russia as part of our multi-asset investment process. Our partners select high-performing active managers and remain confident in their ability to generate positive returns across this global region.
Beyond Russia, the most extreme moves in financial markets have been evident in commodities. Crude oil and natural gas prices initially spiked higher, but have since eased. However, your funds are not invested directly in commodities, which are viewed as a highly cyclical and volatile market, and the recent price action has borne out. However, the UK stock market contains several large energy companies that should benefit from higher commodity prices.
A considered response
Our investment partners have recently increased allocations to a FTSE-100 index fund, so your portfolios are positioned to benefit from any potential outperformance of the UK market should energy prices continue to rise.
It is always difficult to form an accurate forward-looking view in situations like these. Nevertheless, it is important to form an opinion and act accordingly. Portfolio positioning can then be evaluated and changed should the situation require it.
The crisis today is not unlike the Annexation of Crimea in 2014, the last time Russia took over an internationally recognised region of Ukraine. In a further similarity, Russia saying its actions are aimed at protecting pro-Russian separatists in Donbas. Western nations issued strict sanctions on Russia after Crimea was annexed, and have responded again with similar measures. We see the annexation of Donbas and consequential economic sanctions as the most likely outcome, with both Europe and Russia looking to avoid an outright war on the continent.
Both sides are economically vulnerable to further escalation; Russia controls a significant supply of commodities into Europe. On the other hand, Russia would severely cripple its own economy if Western Europe looked elsewhere for its commodity requirements.
We therefore hope the situation does not worsen and that rational minds prevail. Investors can rest assured we, along with investment partners, are continuously monitoring the situation, and will look to revise portfolio allocations if the situation in Ukraine escalates from here.
Keeping you informed
We continue to speak to the fund managers and investment specialists to gain their insight and understanding of the situation. We are committed to keeping you informed so will continue to provide regular updates and of course welcome your calls and questions.
We want all of our clients to have a positive long term experience of investing and we will continue to keep you updated with useful information. Please do not hesitate to contact me to discuss further.