Introduction

Russia, Ukraine, and Your PortfolioBy Anthony Warr

The invasion of Ukraine by neighbouring Russia will be felt across several markets, from food and energy prices; to global stock markets; to safe haven assets like bonds and gold, and to future changes in interest rates. However much of the effects of the conflict are already priced into markets.

Russia, Ukraine, and Your Portfolio By Anthony Warr

Ukraine

The invasion of Ukraine by neighbouring Russia will be felt across several markets, from food and energy prices; to global stock markets; to safe haven assets like bonds and gold, and to future changes in interest rates. However much of the effects of the conflict are already priced into markets.

The best investment strategy is to keep a disciplined long-term focus and not change your portfolio settings.

Having said that, it is natural to be concerned about possible economic outcomes of the current situation, and importantly, exposure to Russia in your portfolio. Below we address these two questions.

What are the possible economic effects?

Food 

Ukraine is the world's third-largest exporter of corn and fourth-largest exporter of wheat, so any interruption to the flow of grain is likely to have a major impact on prices and add further fuel to food inflation. This is at a time when its affordability is a major concern across the globe following the economic damage caused by the COVID-19 pandemic.

Energy 

Energy markets are likely to be hit if tensions turn into conflict. Europe relies on Russia for around 35% of its natural gas. There could be a rise in oil prices which could reduce global GDP growth while increasing inflation.

Bonds 

A major risk event usually sees investors rushing back to bonds, which represent the safest assets. However, the Russian invasion of Ukraine risks further pushing up oil prices -- and therefore inflation. The bond market is reflecting these opposing forces.

Stock Markets 

The conflict adds to a wall of worries for global stock markets, following a rout triggered by concerns over aggressive monetary tightening by central banks anxious to tame surging inflation. The less-forgiving macroeconomic backdrop has pulled major benchmarks off their record highs.

Interest Rates 

Sanctions imposed this week against Russia could further push up gas and oil prices which could push inflation even higher. The US Federal Reserve is expected to raise interest rates seven times this year as it tackles a 40-year high in inflation.

However, the conflict may slow global economic growth, in which case central banks will be cautious about how fast and how far rates rise. The consensus view is that inflationary consequences of the Ukraine crisis are a much greater focus than a negative impact on growth, implying that central banks will not be deterred from their current path of expected rate rises.

Bond yields have not plummeted, which one might expect in a flight to safety, due to the fact oil prices have also lifted, which has heightened already high inflation concerns. It also perhaps reflects that the bond market is already ‘looking through’ the conflict, on the view that it won’t overly disrupt global economic growth or the US Federal Reserve’s intention to raise interest rates next month.

What is the exposure to Russia in our EAC Portfolios?

The WARR HUNT Investment Committee has reviewed our clients’ exposure to Russia through our Enhanced Asset Class (EAC) equity strategy, and note as of 8 March we have no exposure.

The Bottom Line  

Given the difficulty in timing market reactions to geopolitical developments, most equity investors should stick to an appropriate long-term investment strategy.  Selling shares or switching to a more conservative investment strategy after a major fall just locks in a loss and trying to time the rebound is very hard such that many only get back in after the market has recovered.

As tensions rise, history shows that investors overestimate the downside impact and underestimate the possibility of a positive resolution. In the worst-case scenario that Russia does take Ukraine, as they took Crimea, a lot of the bad news is priced in.  A Russian invasion of Ukraine will, at least in the short term, extend 2022's volatility in the stock market.

Geopolitics rattling markets is nothing new.  The good news is that the impact tends to be short-lived, as can be seen from the chart above. Most importantly, history shows that 12 months after events such as our current crisis, the market edges higher. Be that as it may, investors can expect markets to remain on edge for weeks. Sitting tight is often the best course of action.

Please contact us if we can be of assistance on +61399350970 or email admin@warrhunt.com.au.

You can also watch an update from Dr Steve Garth, Independent member of the investment committee, share his insights in this video.

Anthony Warr

Anthony Warr - "“It’s an absolute privilege to guide our clients in their financial and wealth management, and knowing that we play a part in them living a happy and fulfilling life”