Russian president Vladimir Putin, left, and Ukraine president Volodymyr Zelensky © FT montage/Getty Images/Reuters

Russia Ukraine Conflict – Investment Committee Insight

Dear Clients,

In light of geopolitical conflict within Eastern Europe, our investment committee Elston Bridge provides the following insight.

 

Key Points:

  • We do not see the ongoing unrest materially shifting the pattern of a global economic expansion.*
  • We expect volatility to increase as uncertainty around the conflict grows, and the risk of a prolonged market sell-off will likely persist.
  • Rebalancing & Tactical opportunities may arise, but we maintain that broad diversification remains the best stance.
  • We expect Central Banks to remain focused on inflation and employment measures.

 

It is very hard to comment on the shorter-term volatility – we are certainly not geopolitical/conflict experts, and the situation is ever-evolving.

Global markets were not pricing in a war scenario (the focus was firmly on inflation & rates), and we have seen an adjustment based on the magnitude of this military move. The expectation is that it will take time for tensions to settle, uncertainty and volatility will likely persist, and the possibility of some excesses to the downside remains.

A geopolitical shock of this nature is a risk to react to, rather than position for ahead of time, most likely in the form of rebalancing and or tactical tilts around the SAA. This is primarily due to the difficulty in timing markets and also the short-term historical impacts conflicts have had on markets nature (see below table). Even at the tactical level, our positioning is on 6-12 month basis – We are hoping history rhymes and repeats….

 

During volatile periods, it’s important to reaffirm with clients investment timeframes and their Strategic Asset Allocations – the more they assess their portfolios in these types of environments, the more likely they are to succumb to loss aversion. Moreover, close monitoring of portfolios during these periods will leave them susceptible to recency bias as they will naturally focus on what’s done poorly. Ultimately these biases are driven by short-termism and can lead to sub-optimal investment decisions longer-term. A classic and recent example is the initial covid pullback – where would they be now if they had have sold in Mach 2020? – Good opportunity to roll out the chart discussed at dinner if required.

As for the underlying asset classes, what matters to us is if the change in price is proportional to the worsening underlying fundamentals – we are investors, not traders who take direction bets, and what an investor does is assess how does the current price of a given asset compare with is its long-term value – assessing an assets price relative to value remains the most reliable way to invest over the long-term. Adopting a longer-term timeframe and focusing on fundamentals allows us to objectively evaluate short-term movements in markets.

*The Russian and Ukraine economies are very small in terms of their share of global economic activity, with Russia accounting for 1.7% of global GDP (in USD) and Ukraine just 0.2%. The impact of the conflict is primarily through commodity prices in an already-hot inflationary environment. If prolonged and growth is impacted, the risk of stagflation globally becomes higher (inflation factor gets reinforced while the growth factor weakens).

Russia’s and Ukraine’s economic importance lies in their outsized share of exports of energy and food; particularly to Europe – Oil, Fuels, Gas and Coal, Russia supplies around 9% of global import demand and 27% of European Union’s (EU27) import demand (Ukraine’s exports to the rest of the world and EU27 are negligible). In terms of Cereals (wheat, barley, maize, etc), between them, Russia and Ukraine supply around 15% of the world’s import needs and 32% of the EU27 import needs.

As always, Portfolio rebalancing remains an effective tool to ride out the price volatility as portfolios are well diversified across and within asset classes.

Bridge Private Wealth.

 

Image: Russian president Vladimir Putin, left, and Ukraine president Volodymyr Zelensky © FT montage/Getty Images/Reuters

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