Henry Gaskin
Posted By Henry Gaskin
04/03/2022

As we continue to watch the shocking and seemingly senseless conflict in Ukraine, our thoughts are with the Ukrainian people and hope that the deeply concerning humanitarian crisis can alleviate in the days and weeks to come.  

We also of course are very closely watching and thinking about investment markets and our clients’ portfolios.   As mentioned in our last update, given the events we are witnessing, the market volatility we have seen in the last fortnight is not surprising.  Equities have sold off globally, with some areas, such as Europe more  impacted than others. History teaches us that when significant geopolitical events are unfolding, markets react badly to the uncertainty of the situation, as we have seen with the sell-offs in recent days.   

At times like this we often get asked by clients what should they do, and what are we doing. Echoing our previous note last week, the first response that we (and all other investment advisers) will give, is that clients should not be looking to any significant action at the current time.  Investing comes with short-term risk, and markets will always be volatile both now and in the future.  Staying the course, holding one’s nerve, and trusting in the long-term approach to investing helps avoid turning short-term volatility into more permanent loss of capital.

Our portfolios are diversified across global markets, and a range of different assets, including equities, bonds, infrastructure, real estate and other types of investments, and this diversification similarly helps limit permanent loss, by spreading exposures and risks.  Whilst our European equity exposure has been hit by the recent volatility, our exposures to other areas such as Japan and broader Asia are proving more resilient.

Within our portfolios we had very little direct exposure to Russian securities, where it appears some capital has been significantly devalued for now due to the impact of the targeted sanctions. Russian securities typically would be held as part of an Emerging Markets allocation.  We hold the Fidelity Emerging Markets (EM) fund as a relatively small position in our portfolios – for example around 4% of our Balanced portfolio as at February 2022.  Direct Russian securities comprised around 4% of the Fidelity EM fund last week, and therefore our exposure was around 0.16% of our overall Balanced portfolio. Whilst this exposure will vary slightly for other portfolios, it is not likely to be significant in any.

I have spent the last two days at an investment conference in London, catching up with around a dozen different investment managers of funds we use within our clients portfolios, across a range of investment houses and asset classes.  It has been extremely useful to speak with them to assess their range of views around the impact of the current situation on their strategies and markets in which they invest.  We use a variety of active fund managers within the portfolio, who will adapt and alter your portfolio through their actions, and meeting and monitoring them is a key part of our ongoing work on your behalf.   

Of course, no-one is able to predict what happens in the short-term.  No-one knows the inner workings of what is going on in Ukraine, in the Kremlin, or indeed how other politicians and importantly central bankers will react. Trying to take bets on political decisions we can’t predict is not something that we or our underlying fund managers will do.

However, periods of volatility such as this do create opportunities for long-term active investors, such as those that manage the funds within our portfolios.  Fearful markets often sell-off indiscriminately but once fear and uncertainty abates, markets return to focussing on the fundamentals.  

It is times like these that managers return to their fundamental analysis of economies and companies, and see what opportunities exist to be taken advantage of.  Whilst the outlook for some sectors have now changed significantly, (defence & energy to name a couple) longer-term themes and opportunities in broader sectors that made sense before the conflict began may not have materially altered, and the volatility in the last couple of weeks will have made some more attractive for active managers to exploit.  

The Russian economy is limited on a global scale, but we are of course aware as to its importance as a producer of commodities – oil, gas, food and others.  At present sanctions have had a limited impact on the commodity supply, but we have seen prices spike which will have a knock-on effect on how long inflation persists. Naturally there will be some areas that are more badly affected by commodity prices, should they persist higher for longer, and again active management can help navigate these challenges.

We went into the year broadly positive on the global economy, as the world generally exits the grip of the COVID pandemic, and pent-up demand and cash savings get released into the economy.  Whilst this phenomenon could have inflationary impacts, it should also be supportive for company earnings and markets.  

As ever it is important to put to one side the short-term emotions and psychological side of investments and concentrate on the long-term fundamentals.  In today’s digital world of wall-to-wall news, this is often not easy, but the pragmatic patient (but active) approach is one we must pursue. This does not mean resting on our laurels though, and we will continue to stay in touch with our underlying investment managers and keep you abreast of our thoughts in the weeks ahead.

In the meantime, please liaise with your usual Wealth Manager contact if you wish to discuss anything in more detail.

Our staff, like our clients no doubt, have been showing their support to the Ukrainian people with donations of vital supplies, and we will continue to support them as well from a company perspective. Our Corporate Social Responsibility committee, are looking at ways we can continue to help the displaced people of Ukraine in the most effective manner.

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