Uncertainty abounds – it always does.
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.