War Times

Over recent weeks markets have shown significant volatility as investors weighed up the likelihood of a Russian invasion in Ukraine. In the early hours of Thursday morning, we got our answer, as Putin ordered his military to commence multiple invasions across Ukraine.

The immediate reaction for global equity markets saw them move considerably lower. Asian, European and UK markets all suffered daily falls of between 2 to 4% yesterday yesterday (US markets actually turned positive towards the end of the session, finishing c.1% up). However, this was nothing compared to Russia’s own equity market, falling by over 50% at its open. This indicates that investors feel the Russian economy will suffer the most as Ukrainian allies enforce punitive sanctions designed to apply pressure to it.

What can we expect from here?

In last week’s note we referenced Russia as one of the world’s leading suppliers of oil and natural gas. In fact, they account for 24% of global natural gas supply. In other words, they are a net exporter of energy and rely heavily on the rest of the world to purchase their natural resources. Many of the sanctions are intended to limit trade with Russia; the knock-on effect will be a further shortage of oil and gas as other nations refuse to use Russian supplies.  As a result, commodity prices will continue to be pushed higher. On Thursday morning we saw oil prices top $100 a barrel for the first time in seven years.

As the conflict plays out, we can expect wider equity markets to experience further volatility. How volatile markets become will be driven by the political reaction of other nations (how much further tensions will rise) as well as the level of sanctions that are introduced.

There is certainly a correlation between the threat of war and a ‘risk off’ environment for markets, but whilst we are still in the very early stages of the conflict it is hard to predict the short term market reaction.

How have markets reacted during previous conflicts?

In 1990, tensions were simmering between Iraq and Kuwait (supported by US led allied forces) which eventually led to the start of the Gulf War. Interestingly, in the period precipitating the war, markets aggressively sold off with the US market (S&P 500) falling by 13%. However, within 6 weeks of the war breaking out, markets very quickly turned positive.

Any others?

In fact, there are plenty of other examples beyond the Gulf War.  Many conflicts in the past have seen markets plummet in the weeks and months before any war actually started, only to turn positive shortly after war broke out. 

Source: Bowmore Asset Management, 2017

What about our Portfolios?

Unfortunately, there had been no hiding from the equity market sell off and portfolios have suffered as a result. However, other areas of the portfolios have held up well, especially within our allocation to Alternatives.  Moreover, despite what the reaction of markets would lead you to believe, good companies do not become bad companies overnight. Our portfolios are positioned to benefit from long term economic and investment trends, and we continue to favour areas of the markets that have long term growth potential with manageable risks. We are still relatively sanguine about the prospects for equity markets in the short to medium term. Amidst the current chaos, Q4 2021 earnings season is in full swing, and the news continues to reinforce the strength and resilience of certain economies and their underlying companies. Without the distractions of war, the wider equity market news would be far more positive, perhaps focusing on the strength of the consumer and M&A markets.

Our thoughts are with the innocent people caught up in conflict. If you have any questions in relation to your own portfolio, please do not hesitate to get in touch.

Source: Refinitiv – Market returns as at 24/02/2022