Events unfolding in the last few days with the Russian invasion of Ukraine have been very unsettling for all of us.  It is important for us to also consider the impact of this situation from an investment perspective on behalf of our clients.    Markets have unsurprisingly reacted to the situation globally.  Whilst we recognise that investors may be feeling very nervous about the backdrop of rising inflation and heightened geopolitical threats, we don’t think this is a time to take unconsidered investment decisions.  Russia’s invasion of Ukraine has undoubtedly shaken markets which have already been in a period of higher volatility since the beginning of the year.   As equity markets have sold off, some investors may consider selling their investments, but with a highly unpredictable course ahead, it would be difficult to take such action with a level of confidence in the outcome.  As a firm, we have always believed that “timing the markets” is fraught with danger and can sometimes cause more harm than good.  In the short term, you would be crystallising losses based on market momentum.  This is not something we would recommend.

 

All clients are likely to see some level of short-term impact in their investment portfolios.  However, this might not be in a way they might expect on reading the dramatic headlines which focus primarily on the main equity market index falls.  Importantly, we aim to build diversified portfolios for our clients and in doing so, provide a balance of risk to macroeconomic or geopolitical events.  There will be some companies, sectors, geographies, and asset classes which will face a direct negative impact from this war.  Others will be more insulated from the effects of this situation.  For obvious reasons, Russia’s stock market has fallen dramatically since the 24th of February.  Broader global equity markets have also felt the impact of a “flight to safety” in the wake of Russia’s actions.

 

Oil/energy prices have risen sharply.  As a key exporter of oil & gas but also agricultural commodities, sanctions against Russia will have a knock-on effect on a number of industries. As would any retaliatory action to disrupt supplies of essential commodities from Russia. Some countries are more reliant on these exports than others.  The web of globalisation is complex, and the initial momentum driven trades made at the start of this crisis do not reflect the difficulties which would face far reaching parts of the global economy in a protracted war.

 

Fixed income markets have had a tough period in recent months, as markets adjust to higher inflation and the prospect of higher interest rates.  The yields on sovereign bonds have reversed in recent days, as this asset class reasserts its role as a “safe haven” investment.  With the prospect of higher energy costs feeding inflation in the coming months, the threat of higher interest rates remains on the table, but the pace of those rises may now change to accommodate the risk of an economic slowdown.  In any case, it would not be surprising to see yields climb again in the coming weeks or months.  Other “safe haven” assets which include gold and the US dollar have risen in recent days.

 

Against this backdrop we are in contact with the managers of the investment funds in your portfolios and there has been a strong level of communication across the board.  The message we are receiving is consistent and reassuring.  They are not making “knee-jerk decisions”.  They are reviewing their portfolios and revisiting the investment case for underlying holdings.  They remain focused on their investment process, discipline and delivering their long-term objectives.

 

We expect volatility across asset classes to continue until the military and political situation stabilises.  Our client portfolios will reflect the risk tolerance and appetite of the individual client and therefore, there will be varying degrees of exposure to numerous assets classes and geographic regions.  The most important factor in building our client portfolios is diversification and balance of risk and this is something that we will continue to focus on regardless of the geopolitical or macroeconomic backdrop.  The importance of this strategy can sometimes be best demonstrated in these times of market stress.  If you would like to discuss the positioning of your own portfolio, please contact a member of the team to discuss this in more detail.

 

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March 4, 2022 Post by Roisin Duffy
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