Today, it certainly feels like the world is in a very uncertain place. The events in Ukraine are extremely unsettling; the eyes of the world are firmly on what happens next. 

Coupled with this, The World continues to struggle with what is hopefully the back-end of the Covid crisis as populations gather immunity through vaccination and infection and as new drugs and treatments come online almost daily.  Economically, the greatest challenge is soaring inflation, hitting levels not seen for several decades.  Consequently, interest rates and yields on bonds have started to rise, and global equity markets have started the year down.  That can all feel both gloomy and unsettling.

Stock markets falling on the back of geopolitical events is nothing new; we have been there many times before. It is always easy to feel that the present is more uncertain than the past. A common phrase we hear is “this time it is different”. Yes, this is a different event, but we have been through similar. The table below shows the S&P 500 (US index) performance in periods after major historical geopolitical/military events.

In summary, the stock market was higher one year after in nine of the 12 events above. The other three coincided with a recession.

Could we have predicted this?

The threat of Russia invading Ukraine has been around for many years now. Yes, the news has ramped up over the past couple of months, so you could argue this was always on the cards. Jumping in and out of markets based on news events is a very dangerous game to play. Not only do you have to make a call on when to exit markets, but you also need to decide when to get back in. Once you start to make calls like this, where do you draw the line? As a business, this goes against our fundamental investment beliefs. Based on today's news, being shaken out of markets is about the worst mistake any long-term investor can make.

What is to be done?

The short answer is ‘not much’. As ever, all the news that we see and worry about – including an invasion of Ukraine by Russia - is already reflected in market prices. For sure, new news will have an influence on those prices, but by its very definition, this is a random process that is hard to benefit from unless you own a crystal ball.

In terms of direct portfolio exposure, it is worth noting that Russia represents around 0.35% of global equity markets, and that is before this is diluted down in any portfolio by bond holdings. To put this in perspective, the global market weight of Apple is over 4%! In fact, Apple’s cash reserves alone are of a broadly similar magnitude to Russia’s entire market capitalisation.

At this stage, nobody knows the wider consequences of a Russian invasion. Below are a few things to be thinking about:

• Have your financial and personal circumstances changed recently to such an extent that you need immediate liquidity from your equity positions? That is most unlikely. Feeling uncertain about markets is not a valid reason for seeking to get out of markets (when would you get back in?).

• Remember that our high-quality bonds provide several valuable attributes. They provide more stable values, supporting a portfolio against equity market falls; liquidity to meet any liabilities without having to sell equities when they are down, and the dry powder to rebalance the portfolio and buy more equities when they have fallen to take advantage of cheap equity prices (as we did in the Covid crash two years ago).

• We should all be vigilant (as always) on cyber security. If you need any help with this, please do contact us. Rest assured, we treat cyber security extremely serious here at Ifamax and have measures in place.

Have you read any market forecasts for 2020 yet? There is something about the turn of the calendar year that brings out the thumb-suckers in the media as sage reflection on the year just past gives way to blue-sky speculation about the coming 12 months.

To be sure, there is an economic element in this. Newsrooms tend to thin out over the holiday season as staff are told to clear accumulated leave. Media outlets stockpile think-piece fodder from bankers and brokers to fill the gaps between the ads for a few weeks. End-of-year specials are a popular go-to feature.

This is why you are confronted with clickbait headlines at this time like “Ten Big Economic Surprises for 2020” or “Five Stocks You Can Count on in the Coming Year” or “Your Armageddon Portfolio: Bunker Down with these Shares”.

Last year’s predictions

Actually, there were plenty of these types of headlines around Christmas 2018 following the global equity markets’ worst calendar year performance in seven years. The US-China trade war was heating up, the Brexit saga was roiling markets and there was mounting evidence of a significant global economic slowdown in the pipeline.

So on New Year’s Eve 2018, CNN pitched in with a guest economist’s column titled How Populism will Cause a Crisis in Markets in 2019.  The argument was that the impossibly simplistic solutions enacted by populist politicians to the post-GFC stagnation in developed economies would come home to roost in the coming year.

How things panned out

The analysis appeared sound, but a year on and we’re still waiting for the promised reality check. Equity markets have experienced double-digit gains in 2019. The US market has kept breaking records, to be up more than 20%. Against most expectations a year ago, bond markets have had another stellar year, with yields reaching unchartered territory.

To be fair, expectations that 2019 would mark a brutal reckoning for markets were widely held. In December 2018, a survey by Natixis Investment Managers said two thirds of institutional investors believed the US bull market would come to an end in the coming year.

The biggest threats cited were geopolitical disruptions, such as Brexit and trade wars, while rising interest rates were also seen as posing a significant risk.

A year on and those issues grind on. Markets vacillate according to every tweet from Donald Trump, though the UK election has taken some of the wind out of the Brexit issue. As for interest rates, they have spent most of the year falling, not rising.

The growth slowdown also triggered a wave of downgrades by major brokerages and banks in late 2018. Barclays won headlines when it lowered its year-end target for the S&P-500 to 2750 from 3000, citing bearish retail investor sentiment and slowing growth outside the US. Actually, they got it right first time and should have stuck to the original call because the index was above 3100 going into December, or about 25% higher over the year.

The cataclysm that wasn’t 

Every year, you see these calls go awry, perhaps none so spectacularly as the headline-grabbing line from the Royal Bank of Scotland in early 2016, telling clients in a research note to ‘sell everything’ in anticipation of a “cataclysmic” year in markets.

“Sell everything except high quality bonds,” the bank told clients. “This is about return of capital, not return on capital. In a crowded hall, exit doors are small.” 

It would have been a shame for those investors who followed that advice, because global equity markets delivered a return of about 8% that year in US dollar terms. In fact, the total return of equity markets from early 2016 to late 2019, as measured by the MSCI All Country World Index was more than 40%.

Opinions are soon out of date

The truth is everyone can have an opinion about the market outlook, but that’s all they are — opinions. And the problem with writing economic commentary on the run is you are always responding to news. Within a day of writing it, it’s usually out of date.

To be sure, there is still a case for economic analysis. The problem arises when you try to connect long-term analysis to short-term speculation about market direction. Markets respond to news based on the collective expectations of millions of participations. This is another way of saying all those opinions are already reflected in prices.

In any case, an economic or market forecast is inevitably based on a bunch of underlying assumptions, anyone of which can be thrown awry by events. Nothing really is constant, which is why forecasting is such a tough and unforgiving business.

Don’t indulge 

The media’s need for big market calls that attract eyeballs is easy to understand. We’re naturally drawn to the idea that someone out there can see the future clearly. The reality, unfortunately, is that no-one can. Everyone is guessing. 

Seasonal speculation is fun and diverting. But you’re better off choosing something else to indulge in.

Picture: Denise Karis via Unsplash