This update should not be taken as advice. If you are unsure about any of the content please contact your financial adviser. Please remember that the value of stock market investments will fluctuate and investors may not get back the original amount invested. To assist, where appropriate, a glossary explaining some of the terms used has been provided at the end of this update.
I started writing these update notes almost exactly 2 years ago. They were intended to provide an insight on our thoughts on economies, financial markets and how we were managing assets through the COVID pandemic. Events were moving so fast that we issued them weekly; as the situation became calmer it was more appropriate to do so on a monthly basis. The point of saying that is; during the early stages, it was necessary to caveat many of the comments with “at the time of writing” and that is very much the case with this update.
It is being drafted on the evening of 24th February 2022; the day that Russian armed forces moved into Ukraine. It was also the day the UK had COVID restrictions removed; ironic. I need to be careful in the language I use as it is a very sensitive issue and I will move onto the potential economic and financial market impact quickly.
I will also keep this brief as you will be living the story on every media channel and your email inbox will be full of wise advice; I have little of that, it is very difficult to offer that in times like this.
It was unclear before and is less so now
For some months we have been struggling with how rising inflation, central bank policy, slowing economic growth, the waning of COVID and its legacy would impact on financial markets. Just when we thought the outlook was getting clearer, something came along that muddied the waters.
But, to some extent, the changing influences were marginal. The big story was clear; inflation was rising, central bank policy was tightening and COVID was less of an issue. Different asset classes reacted as you would expect them to; bond markets fell, gold rose and within stock markets, companies that were more sensitive to economic recovery, typically, did better than those that were not.
However, overriding that was the fear that, in the medium term, the economic cycle would roll over and the prospects would be distinctly less rosy.
Simply, the outlook was uncertain.
The bear in the room
The potential for political and military action in Russia and Ukraine has been evident for some time. However, it was difficult to measure the potential economic and financial market risk. Some decisions were simple; avoid specific known risk and mitigate potential risk.
However, it is politics that we have been trying to monitor, understand and evaluate; the second two of those factors makes the whole process subjective. Therefore, other than specifics, for the most part, asset prices have been taking the situation into account and waiting for events to unfold.
Keep it simple
Normally at times of stress and uncertainty (which would include significant military conflict), the immediate reaction of market participants is one of “risk off”, which means buying safe haven assets and selling riskier ones. However, in this case the result of the conflict is likely to lead to higher energy and food prices and therefore higher inflation, which is bad for the “go to” safe haven asset class; government bonds.
Different asset class; different reaction
I will go back to where I started for a moment; events are moving very quickly and markets will react to that just as quickly.
It would be reasonable to expect that the gold price would do well in a stressed political, economic and market environment; it is a physical asset with a limited supply that can be physically held and traded. Not a bad asset to hold at a time like this, you would think.
However, the speech delivered by President Biden on the day of the Russian move was seen to be much less harsh in terms of the sanctions and action being taken against Russia than expected and the price of gold fell. Similarly, Russian energy exports escaped restrictions and the US President said he “would do everything in my power to limit the pain the American people are feeling at the gas pump”. Energy prices reacted accordingly; they fell, when you may have expected them to carry on up.
As I write this, it is possible to paint almost any picture you like on the outlook for economies and financial markets. The US stock markets have just closed, the NASDAQ 100 Index was up 3.35% on the day. Its biggest constituents are the giant technology and communications companies which did so well through the pandemic and then did badly as the world opened up again. Now they are suddenly back in favour for the perceived surety of their growth prospects, which never actually changed; how they were valued changed.
What have we done and what are we doing?
We constantly monitor the risks in the funds we manage. That is undertaken by the fund managers and also by the independent risk management team. We reviewed the exposures we had to Russia, Ukraine, associated countries and relevant industries and took action as necessary, selling specific positions. We have also looked at other associated potential geo-political risks and taken action, including selling Taiwanese companies. Managing investment funds means managing investment risk; that comes in many forms and we act upon those when required.
I don’t know. No one does. The short term is unclear, the medium term is uncertain and the long term has become less predictable. Asset prices are likely to remain volatile and we will actively manage our funds to meet their investment objectives.