Thoughts on Ukraine

With the tragic events unfolding in Ukraine and with thought for the victims of this terrible conflict, we have compiled some points made by recent asset manager commentaries to give you some perspective. This is for your information only and should not be construed as investment advice.
 

• The duration of the conflict is impossible to predict but it should not stray beyond Ukraine. Should it enter NATO territory, the consequences become potentially much more serious. 
• Assuming it remains within Ukraine, the direct economic impact globally should be limited as Ukraine is a small economy and Russia’s is smaller than the UK. The sanctions imposed on Russia will likely be very damaging to their economy.
• This conflict has shaken stock markets in a predictable pattern. Oil and gas prices have surged, and safe-haven assets like the US dollar, government bonds and gold have risen.
• Russia has experienced the steepest stock market falls, but in developed markets the falls have been relatively modest, with the US holding up better than Europe given the large dependence on Russian gas in the Eurozone.
• The West (particularly Europe) could take a bigger economic hit in the short to medium term, with higher energy prices, loss of business with Russia, and loss of corporate and consumer confidence.
• With the EU’s dependence on Russian gas and oil, a suspension of supplies would affect economic growth in Europe. The US is largely insulated as it is self-sufficient.
• If the conflict remains within Ukraine, it should not cause a major bear market, but rather a short-term shock. Volatility and sharp falls remain possible, but markets had already discounted some of the fears, and had been falling for several weeks prior. 
• Once the conflict is over, volatility should subside. Global growth may then slow significantly due to higher energy prices but may bring the current imbalance of supply/demand back into kilter.

• The immediate impact could be inflation due to energy prices compounding the post-Covid inflationary impact of strong demand and disrupted supply chains.
• Geopolitical events are deeply worrying for investors, but perspective is required. The humanitarian cost is appalling, but wars always end. It comes at a time when the global economy is recovering from the pandemic and while higher energy prices could cause short-term issues, the broader impact should hopefully be limited.
• A secondary effect is that central bank rate hike expectations may be dampened. This is a significant change as many were worrying that rate hikes may be higher than expected. Slower rate hikes could support equity markets in the medium term. 

In Summary:
The US economy is more resilient than Europe, not only because it is self-sustaining in energy, but because the US consumer is healthier financially. Money dished out in the pandemic is still largely unspent, helping consumers cope with rising prices. This is not the case in Europe. China is also resilient, as the source of most supply chains with low inflation. Other Asian countries could also benefit. Of course, US stock markets are dragged down by the conflict but not as deeply as Europe.

It is vital to retain a blend of asset classes in your portfolio, including lower risk bonds and cash as well as equity-based funds. We also believe the long-term investor should not panic-sell in a market dip which could be brief. Unless the war goes beyond Ukraine, markets are expected to recover with time. Obviously, the situation can change daily, making it more important to simply sit tight. 

Contact us here if you wish to discuss you personal portfolio positioning at this time.