On the morning of the 24th of February 2022, the West woke up to the news that Vladimir Putin ordered the Russian Military to move into two pro-Russian republics of Ukraine, namely Donetsk and Luhansk, collectively known as the Donbas area. There has been increased tensions between Russia and Ukraine since late last year and more recently the Russian Military has amassed armed forces on the Ukrainian border, raising global concern about a possible invasion of Ukraine by Russia. On Monday Russia recognised the independence of these two republics and on Tuesday Putin said “the Minsk agreements were dead long before yesterday’s recognition of the people’s republics”. Regardless of Russia’s reasoning for its actions (probably power and influence as Ukraine has been increasingly leaning towards the West – the EU and NATO), the impact on global financial markets is far reaching. The uncertainty regarding the potential for a broader invasion into Ukraine and the reaction by the West (increased sanctions against Russia and even possibly military support to Ukraine) is causing severe volatility in financial markets.
Global stock markets (and risk assets generally), already on the back foot as a result of rising global inflation and interest rates, as well as the US Fed’s actions regarding Quantitative Tapering, are selling off aggressively. As I write, US stock futures are pointing to a 2,5% plus selloff and European stock markets are down approximately 4,5%. Eastern European stock markets are also under significant pressure, especially the Russian stock market, which is down about 25%. Energy prices and commodities are up significantly, the Brent Crude oil price is up 8,5% to above US$ 105 per barrel and natural gas prices are also rising rapidly. Safe haven assets like gold and silver are up in excess of 3%.
It is always difficult to ascertain what lasting impact (if any) these events will have on the global political and financial backdrop, as there are so many potential outcomes. One thing is for sure and that is that increased uncertainty and “risk-off” sentiment will prevail in the short-term and cause wild swings in the value of financial assets like shares.
Concerns that arise relate to:
- A wider strategy by Russia to invade Ukraine. Does this stay a regional crisis or become a global crisis?
- The action to be taken by the West is still uncertain, as Western leaders are only “talking down” the Russians at the moment.
- Military support to Ukraine.
- Increased sanctions against Russia.
- The impact of significantly weaker financial markets on banks’ balance sheets, especially those with exposure to Eastern Europe and Russia.
- The impact of significantly higher energy and commodity prices on already increasing inflation, as transport and manufacturing costs will increase.
- The economic impact of these developments on global economic activity.
- The US Fed’s action as it relates to their stated strategy of increasing interest rates, implementing Quantitative Tapering and running off their balance sheet. Do they stay the course or change direction to support the economy, despite inflation clearly not being “transitory” as they have maintained for so long (our view has been for some time that inflation is a significant problem).
Clearly, there is a lot of uncertainty, as is usually the case with any crisis. Cast your mind back to the Technology bubble of 2001, the Great Financial Crisis of 2008/9, the Covid crisis of 2020 and the many other “mini-crises” in between. We just don’t know how this situation will play out.
However, there is value in remaining calm and not reacting based on emotion. If your financial planning was done well and investment assets are aligned with your financial circumstances and risk appetite, the best course of action is to remain focused on the long-term strategy.
At Pyxis, we have taken great care to ensure that our clients’ investment portfolios are well constructed, keeping risk management in mind. Portfolios are well-diversified across asset classes, geographical regions, investment themes and high quality companies. We have, over the last twelve months, increased cash holdings where appropriate by reducing exposure to what we believed were expensive sectors and shares. We have implemented investment strategies to hedge against the impact of inflation, for example investing in physical gold and silver, commodities, agricultural assets and energy. Our focus on value has steered us towards more defensive sectors and shares, such as consumer staples.
We are therefore comfortable that, despite the discomfort of current events, you can sleep well. However, we won’t be completely unaffected by current events, especially if the situation deteriorates. We do not know what may transpire over the next few months and will continuously monitor developments.
