Market Comment - Ukraine Invasion

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Whilst this comment is primarily aimed at giving you information and reassurance about your investments, it should be noted that the Sands team are very conscious of the humanitarian impact of this invasion, and we do not take this lightly.

As news of the invasion broke we consulted some of the various providers our with whom our clients investments are held, to analyse the impact on stock markets, the economy and investors

How have stock markets reacted?

Stock markets took yesterday’s news badly because it represented the ebbing away of the potential for peaceful de-escalation.

The stock market sell off is a continuation of the heightened volatility we have seen in the first two months of the year due to escalating tensions in the weeks leading up to the invasion, coupled with the risk of rising inflation and interest rate hikes, have been weighing heavily on investor sentiment.

The major risk to stock markets right now is the increase in uncertainty. When uncertainty rises, the ‘risk premium’ increases. In other words, equity valuations fall as investors require higher potential returns to compensate for the higher perceived risks. There is also a risk of contagion to emerging markets more broadly.

The reason why markets are so focused on the current conflict is that Russia is an important source of, and Ukraine is an important transit country for, oil. Supply disruption could lead to further increases in the price of oil, which could exacerbate already high inflation in Europe, resulting in continued market volatility.

What is the potential economic impact?

At this early stage, it is difficult to predict the economic impact.

First, we do not know what Russia’s ambitions are for Ukraine. It is also unclear how long the conflict could last, although the news coming through suggests Russian and Ukrainian military forces are balanced in number, and so the conflict is unlikely to be easily won either way.

Second, while sanctions could hold back Russia’s economic growth, Western leaders generally have a very limited range of sanctions that they are willing and able to deploy.

Cutting off Russia from financial markets would only have an impact when it comes to seeking financing. Russia doesn't need to do this while energy prices stay high. Some have suggested barring Russia from the SWIFT communication system that facilitates international money transfers, but that would seem to impede payment for much-needed Russian gas supplies. In all likelihood, sanctions will focus on individuals and some Russian institutions; there will be great reluctance to threaten commodity supplies upon which Europe, in particular, is heavily dependent.

If sanctions did cause economic disruption in Russia, this is unlikely to have much of an impact on global growth, as Russia’s economy represents only around 1.8% of global gross domestic product. The much greater concern is the extent to which disruptions to oil supply could dampen economic growth more broadly.

The Longer-term outlook...

While events in Ukraine are extremely concerning, it is worth bearing in mind that from an investment perspective, steep declines in stock markets are not unusual, and they tend to be short lived. History shows us that equities have been resilient during periods of crisis in the past, such as the Cuban Missile Crisis, the Iraqi invasion of Kuwait, and 9/11. The impact of these events on the markets, and indeed the economy, were much more fleeting than their significance in modern history.

Stock markets tend to be disconcertingly dispassionate about political and human tragedy, unless it has an overt economic impact. They also tend to anticipate geopolitical risks in advance, which means the onset of conflict can often be the moment that uncertainty peaks.

So, while stock markets are likely to remain volatile in the short term, this may be more to do with ongoing concerns about inflation and interest rates. The longer term outlook for the global economy and equities remains positive as the pandemic-related headwinds reduce, with job and wage gains becoming more common. The events in Russia will contribute to the overall framework investment managers have for assessing the opportunities to grow wealth over the longer term.

We understand that when portfolios experience volatility, it can be concerning, especially if you are new to investing. However, it is important to remember that your investments were set up with a long term view in mind and that volatility will play a part in the long term view of achieving better gains than "cash in the bank", especially as our savings are being eroded to such a degree with inflation being so high.

The team here at Sands are available to discuss any concerns or questions you may have regarding your portfolios so please feel free to contact Matt, Gina or myself for further advice or comment.