Rapid response: Russia/Ukraine

Over the past couple of months, a Russian invasion of Ukraine has gone from a possibility to a probability and now finally a reality. First and foremost, this is of course a human tragedy, and one which will indelibly change the lives of those living in the region.

However, the effects of this conflict on a robustly constructed investment portfolio will be limited in the short term, and most likely indiscernible when we look back in years to come.

Keeping geopolitics out of portfolios

Several weeks ago we wrote that an incursion of some sort seemed more probable than not, but we did not attempt to time the market by tweaking portfolios to reflect that view. Why not? Because prudent stewardship of long-term portfolios demands a disciplined focus on what really matters, rather than succumbing to the temptation to speculate.

We are not geopolitical master strategists, neither do we pretend to be. More to the point we are sceptical that anyone can reliably predict what may unfold in any given crisis. Usually, the chief protagonists (or indeed, antagonists) themselves do not have a plan set in stone, to be guessed-at by the more astute. Armchair generals have an abysmal track record in reliably profiting from geopolitics; much of the good in investment advice comes from avoiding such popular folly.

Indeed, you would struggle to identify the episodes of conflict in a long-term chart of stock market performance. All except the most enveloping conflagrations are short-lived, if not inconsequential, for the world’s capital markets, whatever the human costs. After all, the 20th century did not lack for geopolitical heavy weather, but through it all people carried on with their business, and long-term investments rewarded those who kept calm. If anything, innovation is somewhat ignited by the demands of war – admittedly a mere sliver of a silver lining.

Market movements

At the time of writing, stock markets are more or less unchanged since news broke of Russian recognition and annexation of Donetsk and Luhansk. It might be surprising that the effect on share prices has been so muted, but the key thing to remember is that the events unfolding at present have been building for some time now, tracked by satellite. Putin’s move was by no means a certainty, but neither was it a complete surprise. Market prices reflected this.

Elsewhere, the price of oil has risen towards $100 per barrel, as you would expect, and this will add to inflationary pressures. Consumers will also pay significantly more for the natural gas necessary to heat their homes, especially in those countries more reliant on now verboten Russian supplies. Any residual doubts that central banks will raise interest rates to combat this have surely evaporated.

However, any consequences of this on portfolios will be either insignificant or already factored into the prices of related assets. There is simply no way to outmanoeuvre the collective wisdom of the rest of the world’s investors. Portfolios tracking proportionate global ownership of income-producing assets have, in effect, already taken the necessary action in response to the headlines: no further reactions are warranted or advisable.

Our advice

It is worth a reminder that our portfolios are constructed with a full appreciation that it will not always be plain sailing. We do not assume that the handsome returns of 2021 are the norm: our long-term expectations of equity returns have short-term drops baked in.

Moreover, we control the risk of portfolios using bonds of high credit quality, softening paper losses to the extent that their yields will plausibly allow. This rigorous, evidence-based approach, leery of expensive sophistry, has served well.

As such, the declines we have seen so far this year, mostly related to monetary policy, are par for the course – nothing out of the ordinary, and very much in keeping with the nature of equity investment in varying proportions, depending on risk profile.

That is not to say that it hasn’t been a trying time for even the most sanguine investor. The most sensible course of action is to let the fog of war dispel and your portfolio accrue value in the longer term. But should you have any remaining concerns, you may find peace of mind in a well-considered financial check-up, for which your Private Banker is, as ever, at your disposal.

Important information
Investments can go up and down in value and you may not get back the amount originally invested.