28th February 2022.

Despite the escalation in actions from Russian president Vladimir Putin since our last update, we believe that the financial markets have already priced in much of the negativity, and on Friday, we saw markets close significantly up.

Over the week, we’ve seen Russian troops invade Ukraine, veiled threats of nuclear force from Putin, and sanctions from the west, with one of the most recent sanctions being an exclusion of some Russian lenders from the SWIFT messaging system that underpins trillions of dollars’ worth of transactions.

The sanctions are beginning to take effect, with the Ruble plummeting, and queues at ATMs seeing Russian residents trying to get their cash out. In order to limit the financial impact, Russia has also announced their markets will open 3 hours later today. As of this morning, in order to try to insulate the severe financial impact on their economy, the Bank of Russia has increased interest rates an unprecedented 10.5% to 20%. This comes as the west sanctions look to potentially block Russian access to approximately $640 billion they built up in reserves.

The nuclear deterrent narrative from Putin is likely a distraction from the reality of the current invasion tactics, whilst we are not saying one should not be worried, the recent threats from Putin appear it be the noises of a leader that is out of ideas, and that is potentially now seeing his long-term leadership of Russia under threat. As the threat from Russia has likely not had the effect that Putin intended, driving western nations – if not the world, closer together – and supplying military support, shipping not only weapons, but also funds seeing the likes of the US already supplying $350m of support.

First and foremost, the invasion that we are seeing is very concerning on a humanitarian level, and our thoughts are, of course, with the individuals impacted. It is imperative, at times of geopolitical issues (such as we find ourselves in now) to keep regular readers and watchers of our commentaries informed on our thoughts on the repercussions for markets and for our portfolios.

As such, we certainly aren’t saying that what is happening in Ukraine doesn’t matter, but from a market perspective, we believe it is unlikely to have a significant economic impact.

Whilst we believe the unfolding situation in Ukraine represents short term noise for markets, we have seen increases in commodity prices which are likely to impact inflation: an increase in the price of oil and an increase in the price of gas.

Central banks will need to think carefully about any interest rate increases, given the inflation pinch felt by consumers. As we have said on numerous occasions, the central banks will need to be accommodative and may choose to delay or significantly scale back their planned aggressive increases, to protect and prioritise the economic outlook and the employment markets. This will be good news for economies and global equity markets, as we have said previously, we believe that markets have overreacted, and priced-in a more hawkish stance to raising interest rates than is likely. And so, if these aggressive interest-rate increases (that economists have priced-in) don’t happen, then markets are likely to rally, and breathe a sigh of relief.

Turning to the market volatility we have seen this week (and that is likely to continue over the short-term), history has shown us, time and time again, that markets can deal with any eventuality but hate periods of uncertainty, and in a rapidly developing situation such as the invasion of Ukraine, there has been uncertainty in abundance.

Market-spooking situations come and go. Furthermore, while it may be easier said than done, long-term investors need not be concerned – history is littered with periods where equity markets have fallen sharply for a couple of days or weeks, but quickly recover. For example, only 2 years ago we saw the S&P 500 fall 34% during February and March 2020 due to the coronavirus outbreak – but the index had fully recovered that loss by August 2020 (just 6 months later).

Additionally, not wanting to underplay the distressing situation in Ukraine (and the global fears due to the threats made by Putin), whilst European markets have opened down this morning (Monday 28^th February) and US futures are off, and whilst we expect more volatility to come, markets have already priced in much of this volatility.

Whilst concerns will undoubtedly keep equity market volatility elevated in the short-term, it is important to resist the urge for any knee-jerk reactions as the overall long-term equity outlook remains very positive, with equity market volatility representing attractive opportunities for many global corporates that are in good health.

Investment Management Team