For financial professionals only
Whether it’s viewed as a surprising turn of events or not, the escalation of aggression and overnight invasion of the Ukraine is appalling. We can only hope for limited casualties and loss of life at this point, and ultimately, a quick diplomatic resolution. World leaders have condemned the actions of Russia and looked to address the situation with a barrage of sanctions. Many are focused on access to financing, with the aim of harming the Russia economy. Germany has halted progress on the Nord Stream 2 pipeline, for example, and the US has imposed sanctions on the company in charge of building it.
Energy and inflation
Energy prices have been front and centre this year already, and with oil surpassing $100 today – for the first time since 2014 – this is likely to continue. Pushing out expectations of when inflation figures might start to tend down feel appropriate at this point. A large proportion of global wheat production and supply is also tied to both Russia and Ukraine, any constraints could add to the argument for inflation outlasting current expectations.
Market reaction
The immediate market reaction is as you’d expect. Stocks are down and safe haven assets such as Government Bonds have moved up in value. Yields on both 10yr Gilts and Treasuries have fallen, but not by a huge amount, and both are still comfortably higher than their levels at the start of the year. This ought to be an inflationary event – something nominal bonds don’t like – so perhaps that’s putting a cap on how far yields can move down. Inflation and risk-off sentiment are opposing forces here.
At time of writing, mainland European indices are down close to 5% and now within correction territory (a 10% fall from their high) (1). The UK market, with more of a positive correlation to energy, has fared a little better but is still down. Uncertainty is the driving force behind the losses – the extent of Russia’s action is not yet clear. As we get further information on this and the range of sanctions (and any retaliation to these), markets will digest and find an appropriate level. The fact that we are not in complete market turmoil suggests that, while uncertain, markets see the threat of conflict beyond Ukraine as unlikely.
Our response
Parmenion see the appropriate portfolio response as staying invested and disciplined, avoiding any knee jerk reactions. It is always very hard to position for or predict the impact of geopolitics. To try to time any major changes or predict how markets will subsequently react is unlikely to be a profitable strategy.
Our central asset allocation offers exposure to both nominal and inflation linked Government Bonds, as well as Alternative assets which ought to be uncorrelated to equities.
Within higher risk portfolios, where we use more Emerging Market equities, there will have been exposure to the Russian stock market. However, this is a very small part of the benchmark and shouldn’t have a material impact on returns. A number of Active fund managers we use in this space also have underweight positions, further limiting negative effects.
Watching and responding appropriately
Going forward, it’s right to expect heightened volatility given the magnitude of events. As discretionary managers, we will continue to monitor the situation closely and act accordingly when required.
(1) Source: Infinitiv Datastream
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.