The world’s financial markets have been quick to reflect the consequences of Vladimir Putin’s now full-scale invasion of its neighbour Ukraine.
We are seeing a broad based sell-off as investors exit from risk assets. That means there will be many companies that suffer short-term losses despite not particularly being impacted by the conflict. We saw this in the early days of the Covid-19 pandemic when all companies fell dramatically, only for a great many to recover in short order.
At this stage, the economic consequences of the conflict surround the potential weaponization by Russia of their energy exports, as the world’s second largest producer of oil and natural gas.
Europe gets 9% of its primary energy from Russia as piped natural gas. Interruption to this supply through damage or though President Putin’s political choice would inflict significant pain on western allies through pressure on European consumers, creating an economic slowdown for European industry and of course further fuelling inflation pressure.
Russia’s pivotal role has pushed the price of Brent crude above $105 a barrel. Unsurprisingly, safe haven assets such as the US dollar, government bonds and gold have all rallied.
But the impact goes beyond energy. At risk of disruption is the global supply chain of agricultural commodities and some metals in which Russia and Ukraine are significant suppliers.
If history is any guide, markets are often stronger within a few months of the start of international conflict. As such, markets could easily head higher at the first sign of a solution that is acceptable to both sides.
On days like these, it’s worth remembering the old adage about ‘time in the market, versus time out of the market’. Looking back over the last 20-years, if you missed the top 10 best days in the stock market, your overall return was cut in half. That’s a significant difference for only 10 days over two decades.
For now, although the fall in portfolio values is painful, we gain some comfort from our exposure to high quality companies with sustainable earnings and defensible margins, together with exposure to long-term themes, for which the drivers of growth are largely independent of geopolitical events and traditional economic cycles.
In our experience, at times of heavy selling pressure, calmness and staying the course are likely to be the best approach in the days and weeks ahead.
