Many of you will have spent the last several days riveted to the news – The world remains on edge following the Russian invasion of Ukraine.
The situation in the Ukraine has developed swiftly, and news becomes outdated just as quickly. In this special report, Brandon Zietsman, CEO & CIO PortfolioMetrix, has tried to incorporate geopolitical context and provide military perspectives that will be applicable to how this conflict develops from here onwards, as much as they are relevant to what has happened already. Brandon has also tried to frame the choices available to political leaders that could plausibly provide a pathway out of this conflict.
It is a lengthy report, so by all means use the contents table to jump to the bits that interest you.
Click here for the full report
Investor portfolios and the Ukraine invasion
Recent events in the Ukraine have rattled financial markets, which have in turn left investors – who rightly want to understand the implications to investments portfolios – disconcerted. The key question to be answered is whether the events in the Ukraine will derail global economic growth and cause a downtrend in financial markets. Will the oil price escalate to $150? Will economic growth collapse? Will equity markets crash? While we can’t anticipate or avoid such events, or give emphatic answers, the investment process that PortfolioMetrix follows is designed to create portfolios where the outcomes are not overexposed directionally to one particular political or economic scenario.
Composure in the face of uncertainty
Sticking to a long-term investment strategy during dramatic events like what we are facing in the Ukraine is not easy. The temptation for investors is to draw conclusions, which experience overwhelmingly shows to be less obvious than they seem. History suggests that the risks of knee-jerk reactions are high and may inflict serious damage to portfolios, while severely compromising retirement planning outcomes. History also teaches us that events tend to be transient, but of unknown duration. Trying to time market exits and re-entries is exceptionally difficult and sticking to one’s strategy has been the more sensible option. It does mean enduring high levels of uncertainty, which is not easy.
Geopolitical events have seldom produced profound changes to the direction in markets, but rather amplify or create catalysts for underlying trends that are already in place. Leading up to Russia’s invasion of the Ukraine, markets were already nervous and had begun to pull back off recent highs as they anticipated central banks reducing Covid-era stimulus and raising interest rates. The invasion exacerbated the pre-existing market correction. Interestingly, markets rebounded strongly on Friday after the initial sell-off.
Well-positioned for turbulent times
The situation in the Ukraine is likely to take pressure off global central banks to hike interest rates as quickly as initially anticipated. Rates hikes are designed to slow economic growth, thereby slowing demand-driven inflation. A prolonged situation in the Ukraine and sustained high energy prices will hurt consumers and producers, resulting in a slower economic growth trajectory. The impact of the Ukraine may bring forward what central banks were hoping to achieve with rate hikes.
Our investment managers accept that uncertainty and volatility are a given and that their role is to manage, not avoid, unforeseen risks. A robustly designed investment portfolio, with deliberate exposures to a wide variety of investment opportunities, is typically well-positioned to take advantage of market overreactions in times of volatility. The portfolios are “on standby” to invest into downside dislocations if opportunities present themselves.
It is seldom a smart move to veer from one’s strategy in times of crisis.
The impact of prior geopolitical events on equities and how long it has taken equities to recover:
S&P Reaction to Geopolitical Events
