Here's some encouraging info posted to me by my IFA in relation to the current financial turbulence.
Markets have experienced a choppy start to 2022, with rising inflation and the prospect of rising interest rates at the top of investor concerns. That has clearly been joined and overtaken now by the rapid pace of developments in Ukraine. Events have been so fluid and with so much ebb and flow to markets that it has been a headache of late as to quite when to pen an update, but with markets moving lower today and the sobering scenes across our television screens, I thought it a prudent point to share my thinking and to provide some broader context to the situation.
After weeks of escalating tensions, the disturbing images coming from Ukraine were certainly alarming ones to awake to. Whilst it is potentially still very early in the conflict, longer term data indicates that markets recover their footing, sometimes quite rapidly, especially as the scope and scale of any fighting becomes clear. If we look to examples such as 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. Further back still, there was a big drop in stock 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 particularly serious, but we are confident that markets will bounce-back once tensions subside.
Additionally in this case, Ukraine is not a part of NATO so it seems unlikely at present that any NATO forces will be deployed to the country to come face to face with Russian troops; this would represent an escalation not seen even in the most tense moments of the Cold War. It therefore seems unlikely that there will be any military action outside of Ukraine's territory, but we are clearly at the hands of a leader where the ultimate intentions are unknown and worst case scenarios deeply uncomfortable.
At this point, it is difficult to predict final outcomes. However, over the coming weeks, the wider ramifications for markets will become clearer. Most obvious and already in evidence would seem to be a spike in energy prices due to the impact of western sanctions and potential disruption to pipelines and other infrastructure during the fighting. The flipside is that prices would likely fall sharply if the conflict abated. We are in the midst of companies reporting their fourth quarter 2021 results and the majority have beaten expectations so, as time passes and the initial geopolitical shock is digested, high quality businesses will shine again.
This is an uncomfortable time for investors and portfolios but, as the chart below highlights, volatility happens and markets do not just rise on a steadily upward trajectory. It is never advisable to sell down to cash in the midst of market turbulence, as has been seen over and over again in history and most recently in February and March 2020 when COVID-19 roiled markets, but then quickly rallied. So long as your time horizon has not changed and you do not need any funds in the near term, our advice is to ride this out. That is not to say our management is frozen – we have been and continue to think carefully about adjustments and any areas we need to refine our exposure to, portfolio by portfolio.
