Ukrainian Crisis Update

Summary

  • Global markets endured another volatile week, as Russia intensified its attack on Ukraine. European markets have seen the worst of the declines, as a prolonged conflict threatens to squash growth in the region and increase inflation.
  • Russia’s links with global markets are being cut and the sanctions in response to Russia’s aggression are far reaching. We remain watchful of the impact on the broader macro environment and what will be felt through second-order effects such as energy prices and supply chain disruptions.
  • Further volatility and risk of declines cannot be ruled out, so it’s critical to maintain a diversified portfolio. It’s also important to keep a long-term perspective when investing. The impact of geopolitical events on markets has tended to be relatively short-lived.

Market update

Markets were dominated last week by the Russian invasion of Ukraine for which we can only hope and wish for a swift resolution to a war that is already causing so much suffering. The risk-off environment has intensified the challenging start to the year for financial assets, which had already been volatile owing to concerns about persistently high inflation and central bank interest rate rises. 

Stocks fell sharply on Friday to cap a tumultuous week of trading. Sentiment around the globe deteriorated as the conflict in Ukraine intensified after Russian forces attacked Europe’s largest nuclear power plant. European markets have seen the worst of the declines, as a prolonged conflict threatens to squash growth in the region and increase inflation. Europe’s Stoxx 600 index fell 7% last week, while Germany’s Dax and France’s Cac 40 dropped 10% and Italy’s MIB index was 12% lower. In the UK, the FTSE 100 plunged just over 6% for the week. International markets were somewhat less impacted, but still recorded losses. The S&P 500 and Dow fell more than 1%, with the tech heavy NASDAQ dropping nearly 3%.*

Prices of government bonds rallied, sending yields sharply lower as investors piled into safe havens. Volatility picked up, as the yield of the 10-year US Treasury bond opened the week at 1.92%, fell to as low as 1.68% on Tuesday, then stabilised at 1.73% on Friday. UK Gilts ended the week with the 10-year yield at 1.21%, having fallen as low as 1.07%. The price of U.S crude oil powered through the $100-per-barrel threshold, climbing to as high as $115, up 25% for the week. Precious metals were also trading higher, with gold closing at $1974, up 4.49%.*

Russian stock market

While Moscow has kept its stock market closed since last Monday, foreign-listed shares in Russian companies have plunged. The Russian market is effectively uninvestable and we are now seeing moves by index providers that are cutting Russian equities from widely tracked indexes. Securities will be removed from emerging markets indexes effective March 9 for MSCI and FTSE Russell will delete Russia constituents listed on the Moscow Exchange at a zero value on March 7.

Last week several stock exchanges in the US and Europe called a halt to trading in Russian exchange traded funds as pricing became highly erratic. Most of the underlying securities were not trading because of sanctions and the closure of the Moscow stock exchange. In addition to this, we have seen several dedicated/specialist funds focused on either Russia or Emerging Europe suspended, leaving investors unable to sell their holdings.

Many clients have raised the question of why a lot of global investors owned Russian equities and bonds. The simplest of explanations for this come down to the stock market trading on a very low rating and specifically for gaining cheap exposure to inflation-hedging commodities. For bond investors, the country’s fiscal and current account surpluses made the bonds attractive.

Russia’s links with global markets are being cut and the sanctions in response to Russia’s aggression are far reaching but the two that stand out are the sanctions on Russia’s central bank, which will prevent the bank from accessing its reserves denominated in Euros and dollars. The second was to prevent Russian financial institutions from using the Swift global financial messaging system, which will make it difficult for those institutions to complete cross-border transactions.

Wider market impact

The adverse financial consequences for companies are only starting to appear. We have seen companies such as BP and Shell divesting assets at a loss and we are witnessing a growing number of large international companies from a wide range of industries saying they will limit, freeze, or exit business activities with Russia.

We remain watchful of the impact on the broader macro environment and what will be felt through second-order effects such as energy prices and supply chain disruptions. Higher energy prices are likely to persist and could influence consumer spending and feed through to higher input costs for some companies, while inflation risks remain to the upside.

This leaves central banks with a dilemma as to whether to raise rates to counter inflation or hold off to support the economy. In Jerome Powell’s (Federal Reserve Chair) Congressional testimony last week, Powell stated that it was “too early to say” if Russia’s invasion would change the Fed’s policy over the medium term, but that policymakers would “move carefully.” Powell also said that he was inclined to stick with a quarter-point increase in the federal funds rate in March, dispelling fears of a 50-basis point increase.

Schroders Investment Solutions Portfolios

Our Portfolios follow a long-term strategic asset allocation approach where no short-term market timing is incorporated. This approach is maintained throughout economic cycles, rebalancing in line with its strategic asset allocation on a quarterly basis.

Funds used within our portfolios follow a rigorous and repeatable investment process and are selected based on their investment philosophy, risk management process, team dynamics, team experience and underlying investment style. We therefore believe they are well equipped to navigate these difficult market conditions.

We have made no changes to our portfolios or funds used at this stage. We had been engaging with our fund managers ahead of the escalation in geopolitical tensions and following the secondary sanctions announced. No underlying funds are subject to suspension. Our Emerging Market exposure is taken through globally diversified fund managers.

Whilst near-term headwinds have strengthened, and the economic expansion is unlikely to advance completely unscathed. We don't think this signals an impending end to the expansion; particularly given the position of strength the economy is currently navigating from. We do however expect more volatility, but underlying conditions should offer broader support over time.

In this environment of heightened uncertainty, it is critical to maintain a diversified portfolio. We remain diversified across regions, sectors, and asset classes which reduces our exposure to idiosyncratic risks related to the war in Ukraine.

Markets are already registering double digit year to date declines and further volatility and risk of declines cannot be ruled out. If that happens, it can become much harder to avoid being influenced by our emotions – and be tempted to ditch stocks and dash for cash. However, our research shows that, historically, that would have been the worst financial decision an investor could have made.

We stress the importance of keeping a long-term perspective when investing. The impact of geopolitical events on markets has tended to be relatively short-lived.

 

 

What are the risks?

Prior to making an investment decision, please consider the following risks:

Capital risk: All capital invested is at risk. You may not get back some or all of your investment.

Counterparty risk: The portfolios may have contractual agreements with counterparties. If a counterparty is unable to fulfil their obligations, the sum that they owe to the portfolios may be lost in part or in whole.

Credit risk: A decline in the financial health of an issuer could cause the value of the instruments it issues, such as equities or bonds, to fall or become worthless.

Currency risk: The portfolios may lose value as a result of movements in foreign exchange rates.

Derivatives risk: A derivative may not perform as expected, and may create losses greater than the cost of the derivative.

Derivatives risk – efficient portfolio management and investment purposes: Derivatives may be used to manage the portfolios efficiently. A derivative may not perform as expected, may create losses greater than the cost of the derivative and may result in losses to the portfolios. The portfolios may also materially invest in derivatives including using short selling and leverage techniques with the aim of making a return. When the value of an asset changes, the value of a derivative based on that asset may change to a much greater extent. This may result in greater losses than investing in the underlying asset.

Equity risk: Equity prices fluctuate daily, based on many factors including general, economic, industry or company news.

High yield bond risk: High yield bonds (normally lower rated or unrated) generally carry greater market, credit and liquidity risk.

IBOR risk: The transition of the financial markets away from the use of interbank offered rates (IBORs) to alternative reference rates may impact the valuation of certain holdings and disrupt liquidity in certain instruments. This may impact the investment performance of the portfolios.

Interest rate risk: The portfolios may lose value as a direct result of interest rate changes.

Investments in other collective investment schemes risk: The portfolios will invest mainly in other collective investment schemes.

Leverage risk: The portfolios use derivatives for leverage, which makes them more sensitive to certain market or interest rate movements and may cause above-average volatility and risk of loss.

Liquidity risk: In difficult market conditions, the portfolios may not be able to sell a security for full value or at all.

Market risk: The value of investments can go up and down and an investor may not get back the amount initially invested.

Money market & deposit risk: A failure of a deposit institution or an issuer of a money market instrument could have a negative impact on the performance of the portfolios.

Negative yields risk: If interest rates are very low or negative, this may have a negative impact on the performance of the portfolios.

Operational risk: Failures at service providers could lead to disruptions of fund operations or losses.

Performance risk: Investment objectives express an intended result but there is no guarantee that such a result will be achieved. Depending on market conditions and the macro economic environment, investment objectives may become more difficult to achieve.

 

Important information:

This document is marketing material. This document is provided by the author and may not necessarily represent views expressed in other Benchmark Capital communications, strategies or funds. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall. The sectors, securities, regions and countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Benchmark Capital does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Benchmark Capital has to its customers under any regulatory system. Regions/sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. This content is issued by Benchmark Capital, Holmwood House, Broadlands Business Campus, Langhurstwood Road, Horsham, West Sussex, RH12 4QP. Registered No. 09404621. Authorised and regulated by the Financial Conduct Authority. UK12619.


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