23 Feb 2022
On Tuesday 22 February, Russian President Vladimir Putin announced that he was ordering troops into Ukraine, ostensibly to “maintain peace” in separatist provinces that Russia had just recognised as being independent. As can be expected, this is viewed by Ukraine and the Western powers (primarily the US and European Union, but they are supported by countries like Australia and New Zealand) as being tantamount to an invasion, and there are sanctions being imposed.
What is likely to happen?
Given Ukraine’s geographic location, the size of the Russian forces opposing them and the lack of military support from allies, there does not seem to be much debate over the outcome of a military encounter. The West is now moving to progressively impose sanctions.
The potential for this to escalate into a major event is present. It will spread to commodity prices (e.g. oil), increase political tensions (which would be seen in more aggressive news articles and statements from world governments), and possibly even sporting events. You will see more stories emerging about the various angles of how the world is affected.
How does this affect my investments?
Whenever sanctions are imposed between major world powers, they disrupt business. This will affect some businesses negatively (e.g. the inability to trade with sanctioned customers, or increased costs), and others positively (gaining new customers from sanctioned companies). The market works dynamically to interpret information and assess its impact across all companies. The markets do not wait for events to unfold but price in the likelihood of events into current prices. As an event becomes more or less certain, prices change accordingly. The largest price swings will occur when an unexpected event occurs.
At present we do not know the impact of Russia’s actions, or the full extent of reactions from other countries we will experience. The consensus appears to be that markets will react negatively, which is an understandable reaction to adverse news.
Four points for investors to remember:
The first point to acknowledge is the importance of ensuring that your portfolio is correctly constructed before events like this occur. Once you hear of a major news event it is usually too late to take action to alter your portfolio in response to the news.
The second point to remember is that none of us can accurately predict the future when constructing a portfolio. Events that are likely to occur are already reflected in market prices, and unlikely events that are not reflected in market prices are riskier. The best way to handle this, without imposing additional risk into your portfolio, is to diversify. Diversification has to be across a range of asset classes, countries and industries. The intention is to have an exposure to those areas that benefit from the news, and not be over-exposed to an area that is adversely affected.
The third point is that market volatility is usually temporary. We have seen that with the share market fall in March 2020 in response to the Covid pandemic. The markets then recovered and went on to new highs. Investors who had the discipline to stay invested were rewarded. Investors who were unable or unwilling to remain invested were likely to have incurred large losses. There is little to say that the current events in the Ukraine will be any different to all the prior crises and events. Patient investors will reap the rewards from impatient investors.
Lastly, you need to acknowledge that it is perfectly reasonable to feel concerned or worried. These events are concerning because they create uncertainty, and people (investors especially) inherently dislike uncertainty. However, while you can acknowledge those feelings, it is important to ensure that you take time to consider all the facts before taking action. Fortunately, there is an easy solution to this.
We are here to help in these uncertain times. We cannot predict what will happen in the future but can provide the assurance necessary to ensure that you focus on your long-term goals. If you have any questions or concerns about your investments get in touch with us.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek guidance.
Best regards
FINANCIAL PROSPERITY PARTNERS
JOY DURRANT
Investment Fiduciary, Trusted Adviser