The news of Russian’s decision to attack Ukraine has come after weeks of speculation about how the situation would play out. With war now in Europe there’s an expectation of turbulence for world markets, especially in the short term. Julian Broom, our Chief Investment Officer, takes a look at what investors should expect.
Russian President Vladimir Putin’s decision to invade Ukraine has seen markets, particularly those in Europe, lurch sharply lower, with some now in technical correction territory. The tragedy of this move, already resulting in high numbers of deaths and citizens fleeing to neighbouring countries, has led to the US and its Western allies imposing significant sanctions aimed at freezing Russia’s assets, halting its banks’ access to European financial markets and targeting “Kremlin interests”.
However, given Europe’s reliance on Russian energy, the sharp escalation in tensions over Ukraine is expected to have an immediate impact on energy prices. Oil recently passed $100 per barrel, whilst inflation – already high on the back of the earlier spike in energy costs – is expected to rise further over the coming months.
The direct effects on inflation will also likely extend to food prices. Between them, Russia and Ukraine export a quarter of the world’s wheat, and Ukraine is a major corn exporter. This would put more upward pressure on food prices, which were already rising by 4% year on year in December.
As investors know all too well – especially given the initial volatility first witnessed two years ago with news of a virus emerging from China – markets can often experience turbulence, with large bouts of price swings throughout a trading day. However, whilst we don’t know how the current situation between Russia and Ukraine will play out, we do know the old adage of ‘time in the markets’ to be key.
Well diversified portfolios, designed to weather these types of geo-political events through a combination of high and more risk averse assets, will stand the test of time. In the first quarter of 2021, we expected that inflation would remain more embedded than the ‘transitory’ narrative being reported, and took action across portfolios accordingly. Given current events unfolding, we believe that this will remain the case, and equally feel that our pivot to more value orientated parts of the market will continue to deliver longer term returns.
Historically, investors have often come up against short term volatility – indeed that’s the very nature of being invested in the stock market – but longer term, it’s remaining invested that’s the key to delivering positive returns.
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