If it wasn’t for the reality that innocent people are being killed in Ukraine, I would feel comfortable in describing the Ukrainian Russian war as a study of the intersection of geopolitics, finance and communication.
I have colleagues with family in Ukraine and Russia and I understand the human cost of the conflict, so I am hesitant to treat the matter as an academic exercise; Yet there is a lot to learn and there are important implications for our finances.
At the risk of causing offence, I make the following observations.
– In an investment context, the Russian Ukrainian war is initially proving to be a catalyst of existing themes, rather than the creator of new themes.
Late last year the emergence of global inflation and increasing interest rates were the main drivers of market volatility.
Sanctions against Russia are having a significant impact on the price of energy (both oil and gas). This factor is set to further exacerbate existing global inflation pressures.
But the impacts are broader than energy costs alone; agricultural commodities have also been affected. Collectively, Russia and Ukraine export 25% of the world’s wheat. Prices have surged in light of the prospects of shortages in the coming season.
The implications are that, if your portfolio had been actively positioned to take advantage of these existing themes, then the outbreak of war will have minimal impact on the value of your portfolio.
– When national interests are threatened, global conventions can be sidelined. So far, there have been two investment examples.
Europe’s reliance on Russian gas supplies has caused concern that coal-fired electric generators will be started up again.
This has raised the spectre of some form of intervention, or suspension, of the global carbon trading system, if European countries return to burning coal. As a result, the value of EU carbon credits has fallen by about 23% since the war began.
Another impact under this heading is that two of the major index providers (MSCI and FTSE Russell) have changed the composition of their indices to exclude Russian shares. This means that, behind the scenes, funds which passively follow these indices will be forced to sell out of Russian shares in difficult markets and at what will probably be lower prices.
Accordingly, they will be locking in losses. To me this highlights a further risk of index investing alone.
– Often markets react in perverse ways. On the day that Russia invaded Ukraine, markets lifted strongly. We often see this reaction. In the period that precedes conflict, markets tend to trade lower across the board due to uncertainty. But once the conflict starts, when at least the initial implications become known, markets often rebound strongly.
– Existential threats seem to amplify our need for expert opinion. Why do we feel the need to know more about things that we have little or no control over? Our daily fascination with the Covid demonstrates this. Being informed about world events is important, but when negativity influences our thinking, it is time to focus on something else.
What practical steps should we consider at a time like this? I suggest starting with the question; what matters are within my control?
When it boils down to it, there are just three critical controllable factors; Your own attitude, your mix of investments (ie asset allocation) and your savings (or spending) rate.
Let’s do a quick audit.
Your attitude: History shows that on average investors do more damage to their finances than markets do. In other words, they are compound losses by selling out, or becoming overly conservative, after markets have dropped. Maintain control of your head space — don’t panic.
Asset allocation: Are you properly diversified across bonds, shares, currencies, commodities and alternative assets in a way that is consistent with your age, stage and risk profile? Is your portfolio geographically diversified? What alternative assets do you hold to protect your wealth against the new market realities of changing technology, higher inflation and rising interest rates?
Savings or spending rates: For those who are saving, increasing your savings during volatile markets can work to your advantage. For retired clients, those who have a well-constructed portfolio will be able to maintain their level of withdrawal without any fear of damaging their long-term position.
My hope for the Ukrainian people is that the conflict will end as soon as possible.
– Peter Ashworth is a principal of New Zealand Funds Management Ltd and is a Dunedin-based financial adviser. The opinions expressed in this column are his own and not necessarily that of his employer. His disclosure statements are available on request and free of charge.