Further to our market update webinar on the 7th February 2022, please find below some further commentary from one of our discretionary portfolio managers Quilter Cheviot on the Russian & Ukraine conflict published on the 24th February.
Published on 24th February 2022
Investors have had a lot thrown at them in recent months, with the emergence of the Omicron variant, rising inflation worries, and the prospect of higher interest rates. To these concerns, we can now add the Russian invasion of Ukraine which, aside from the likelihood of human suffering, poses geopolitical dangers for the West and threatens to make our inflation problems worse. Clearly, it is a fast-moving situation which could change very quickly but, at the time of writing, Russia’s military has launched air and missile attacks across Ukraine as well as land incursions in some areas. This followed Vladimir Putin’s formal recognition of the independence of the breakaway republics in Eastern Ukraine and their request for military support.
Markets have been volatile in the build-up to the crisis with geopolitical tensions exacerbating investor concern about the prospect of higher interest rates. Central banks look set to end years of quantitative easing and ultra-low rates as they attempt to get a grip on rising inflation, taking away what has been an important support for markets. There had been some light at the end of the tunnel, with economists forecasting that the peak in inflation was around the corner as the impact of the pandemic wanes. However, this peak could get pushed back if oil, gas and other commodity prices continue to rise on the back of the Ukraine crisis. Clearly, one of the big risks would be an interruption in the Russian gas supply to Europe.
Volatility is likely to continue in the coming days, though history does give us some comfort that markets should eventually shrug off these geopolitical concerns and recover. During the Crimean annexation of 2014, investors experienced some volatility, but global equities soon resumed their upward trend as the crisis subsided. Going
back further, global markets had a difficult time in the run-up to the US-led invasion of Iraq but bottomed about a week before the troops went in and spent the rest of the year going up steadily. And even further back, there was a big drop in bourses during the Iraqi invasion of Kuwait in August 1990 when the oil price doubled but markets soon stabilised afterwards. Clearly, all geopolitical events are different and this one is particularly serious, but we are confident that markets will bounce back once tensions subside.
In terms of what we are doing in client portfolios, we continue to take a long-term approach and favour a broad mix of internationally diversified equities alongside lower risk alternatives and fixed income. We have been gradually rotating into sectors that should benefit from higher interest rates such as banks as well as energy companies. However, we continue to favour longer-term growth companies with strong franchises and will look to take advantage of any prolonged volatility. While we are still cautious on bonds our fixed income holdings remain focused on liquidity, security and providing diversification from equities. Rest assured that we are monitoring developments closely.
“Investors should remember that the value of investments, and the income from them, can go down as well as up and that past performance is no guarantee of future returns. You may not recover what you invest.
Quilter Cheviot and Quilter Cheviot Investment Management are trading names of Quilter Cheviot Limited. Quilter Cheviot Limited is registered in England with number 01923571, registered office at Senator House, 85 Queen Victoria Street, London, EC4V 4AB. Quilter Cheviot Limited is a member of the London Stock Exchange and authorised and regulated by the UK Financial Conduct Authority. Quilter Cheviot Limited has established a branch in the Dubai International Financial Centre with number 2084 which is regulated by the Dubai Financial Services Authority. Quilter Cheviot Limited is regulated by the Jersey Financial Services Commission for the conduct of investment business and funds services business in Jersey and by the Guernsey Financial Services Commission to carry on investment business in the Bailiwick of Guernsey. Accordingly, in some respects, the regulatory system that applies will be different from that of the United Kingdom.”