Lane Financial Management Ltd Market Commentary
At times like these, after a market shock and subsequent sell-off, it is wholly understandable that investors feel on edge and start looking for the exit. However, experience tells us, and past evidence confirms it, that even the worst selloffs are usually followed by sustained periods of recovery. Across almost all-time spans, returns have recovered significantly over the following one, three, five or ten years after, meaning investors who managed to resist the urge to sell have (in most instances) seen their investments recover their losses and go on to perform very well. This demonstrates that after previous selloffs, investors with a longer time horizon are best placed to hold their ground and remain invested.
Tensions between Russia and the Ukraine had been building for several weeks and many countries imposed sanctions on Russia in a bid to dissuade it from invading. However, these proved futile as Russian president Vladimir Putin announced a “special military operation” against Ukraine. Since then, fighting on the ground has escalated while economic sanctions imposed on Russia by other countries have ramped up. There has also been an attempt by the US, Britain, the EU, and Canada to block Russia’s access to the Swift international banking payment system.
As investment professionals, it’s our responsibility to assess the potential impact on financial markets and the global economy. While we monitor the developments, the only thing that can be said with certainty is that no one knows what Putin will do, or the effect it will or won’t have on the market. In global market terms, we know from history that while geopolitical crises such as this one can roil markets, they usually don’t have longer-term consequences for investors. However, we do not underestimate the risks presented by Russia’s role as a global energy provider. Russia is the source of 10% of the world’s energy, and nearly 50% of the energy consumed in Europe, therefore the risks extend far beyond the borders of Russia and Ukraine, including higher energy prices and increased financial market volatility. Indeed, it’s fair to say that investment markets have already priced in significant levels of risk and consequence due to this factor.
As a result, funds solely invested in Russia, or those with large allocations, crashed to the bottom of February’s performance table. It was not just Russian funds that took a hit in February. All major European sectors were down at the end of the month due to their physical proximity to the crisis, with the IA European Smaller Companies sector making the second largest losses among Investment Association (IA) sectors, down 5.8%.
Oil and energy prices are inherently linked to Russia as it is one of the biggest suppliers globally. Even before political tensions began, the price of these assets had already been pushed up by inflation, although the Ukrainian crisis has overtaken this as the number one investor concern. As a result of increasing commodity prices and inflation spiking as a result will of course impact the base line cost of production and consequently profit lines of companies. This will have a negative impact upon all asset classes in the short term.
In times like these, we encourage investors to block out short term market noise and to focus their attention on the medium to long-term.