Create the life you want
As we raised in our recent newsletter in early February, geopolitical instability generates short-term volatility in investment markets and highlights the importance of retaining your long-term investment perspective during these times. Clearly this has been the case following Russia’s invasion of Ukraine.
While it is paramount to maintain a longer-term perspective during such times, it is equally important to stay informed of developments as they occur. There is a saturation of information and material currently available, which mixes opinions with facts in attempting to explain the motivates and likely implications of the conflict. With this in mind, we have provided the follow summary of our current thoughts and response to the recent Russian invasion of the Ukraine and the implications on the ongoing management of your investment portfolios.
Russia’s invasion of the Ukraine has seen a significant rise in volatility in global markets, with large swings being experienced as investors try to predict the impact of various market drivers such as energy and commodity prices, inflation, interest rates and the overall economy.
Russia is the second largest exporter of oil and the largest exporter of natural gas in the world – with Europe its largest importer. Russia, along with the Ukraine, are large global exporters of agricultural products and metals such as titanium, palladium and aluminium, resulting in significant ripple effects on asset pricing around the globe.
For Australian producers, farmers and exporters this is expected to have positive flow-on benefits as we look to fill in some of the gaps that the supply side disruptions and sanctions on Russia will create.
From a military standpoint, NATO and its allies have currently stated they won’t put troops on the ground in Ukraine, and so direct military conflict between the West and Russia is unlikely at this this stage. An extensive regime of sanctions is being rolled out in the meantime. However, the drawback of sanctions is that they also have an economic cost and disruption to the West – particularly for European countries such as Germany and Italy.
Our investment management response
The situation is fluid. We are actively monitoring developments closely to determine if any changes are warranted to the current portfolios. As our client, you do not hold any direct investment exposure to the Russian or Ukrainian investment markets.
Historically, the past 20 geopolitical conflicts have seen investment markets fall sharply but then regain losses relatively quickly once investors understand the economic implications – resulting in a negligible impact on long term returns. However, this is with the caveat that the conflicts had remained contained within the country of dispute, had not escalated to other regions, and did not involve mass foreign troop deployment. Importantly, most reputable commentators currently hold the view that military conflict will be contained within the Ukraine. Should a broader conflict develop with NATO and its allies, we will look at what portfolio changes may be necessary and will keep you updated should this arise.
At this stage, we are not expecting global economic growth or company earnings to be materially impacted longer term – although clearly there will be some losers. To see a structurally downward trend in equity markets over the medium term, we will need to see the underlying global economy and earnings outlook for companies deteriorate in a meaningful way, which we do not currently anticipate.
In the short term, however, rising energy and commodity prices will further add to inflationary pressures, particularly in Europe. In turn, the outlook for macroeconomic growth may be affected, as business and investor confidence remain subdued.
In conclusion
As we wrote in our most recent newsletter, unfortunately geopolitical instability is a consistent theme throughout history and is best managed by taking a proactive long-term approach to developments as they actually occur. This contrasts with trying to manage by speculation around the numerous scenarios being put forward, many of which will not eventuate.
During these challenging times it’s paramount that our clients stay true to the time-tested investment fundamentals of diversification, risk management and long-term investing in high quality assets, as we navigate together through the uncertain year ahead.
Feel free to contact our office to speak with your adviser if you would like to discuss any of the above content or other financial planning matters. Please also feel free to pass on our details to someone you feel we may be able to assist with their financial affairs, as we’re only too happy to help where we can.
Create the life you want
Chrysalis Lifestyle Planning Pty Ltd
Suite 301, 7 Oaks Avenue
Dee Why NSW 2099
T (02) 9972 2633
E info@chrysalislp.com.au
This business is a Practice Member of the AIOFP, an Association that represents practices that are not owned or affiliated with Financial Institutions. The business does accept commissions from Risk and past Financial product.