Please find below our Investment Market Update as at 25th February 2022.
Blue Sky Investment Market Update
What do we make of it all?
Leaving the emotion to one side of what Putin has done, today, we are exploring the immediate response of investment markets and the short-term outlook.
A colleague said to me yesterday morning as the news was breaking about the invasion of Ukraine, “I’m looking forward to what you have to say in your commentary tomorrow”. This was said more out of relief than sarcasm on the basis that he didn’t have to write it! Recognising of course the challenges.
Between us we went on to speak about how the investment markets would likely react and my immediate response was that this could actually galvanise some equities, although the extent to which this would happen, would be sector specific.
Having managed money for some considerable time, it is evident to me that whilst each conflict has its own unique set of criteria, investment markets tend to behave in a consistent way. Simply put, traders and investors become ‘risk averse’. The worry is the unknown, amidst the conjecture of “will they, wont they” with riskier assets getting sold off quickly. Markets hate uncertainty!
If we cast our minds back to the Gulf Wars, it was a similar situation. Interestingly, markets responded positively when they knew what they were dealing with. I’m not suggesting war is good news whatsoever, but it’s easier to make sense of the immediate future when most of the cards have been dealt!
The Nasdaq Composite Index (tech focused) in the US is a case in point, when it recovered strongly on news of the invasion.
“Nasdaq turns a 3.5% loss into a 3.3% gain”
This was the headline on the ‘MarketWatch’ website in response to trading in the US last night.
It goes onto say, that US stock market investors shook off the Ukraine invasion to end the session in positive territory. The Nasdaq Composite rose by 3.34%, having fallen by 3.45% at its lows of the session but clawed back a gain of over 3%, driven higher by large-capitalization information technology stocks and notable gains in the cybersecurity sector.
The Nasdaq’s gains reflected a broader reversal of investment sentiment across other indices.
Why such a turnaround in the technology sector?
Partly, it’s because we know what we are dealing with, now that an invasion has taken place, but it is also felt that this may weaken the argument for aggressive interest rate rises which have particularly spooked the tech sector. A slower hike in interest rates were deemed to be good news for tech companies.
This just goes to shows how quickly the dynamics can change and why it’s important not to panic.
Market reactions to historical conflicts
History tells us that largely, investment markets have shrugged off past geopolitical conflicts.
John Lynch Research, Chief Investment Strategist at LPL Research states “as serious as this escalation is, previous experiences have indicated it may be unlikely to have a material impact on U.S. economic fundamentals or corporate profits.” John went on to say they aren’t sellers because of the Ukraine/Russia crisis and they expect stocks to weather this event, based on historical precedence.
Similarly quoted in Investopedia, attributed to Ben Carlson, Director of Institutional Asset Management at Ritholtz Wealth Management was the following statement; “From the start of WWII in 1939 until it ended in late 1945, the Dow Jones was up a total of 50%, more than 7% per year. So, during two of the worst wars in modern history, the U.S. stock market was up a combined 115%.” The article was about counterintuitive market outcomes; “The relationship between geopolitical crises and market outcomes isn’t as simple as it seems.”
Of course, it’s far more complicated than just saying stocks bounce back when war occurs but we agree with the sentiment. Every conflict has its own unique set of circumstances and it’s important to be selective.
Commodities are the beneficiaries
In our most recent switch, we moved some money into commodities, and they have proved to not only be resilient but beneficiaries of the Ukrainian/Russian conflict as concerns were raised about supply chains and the cost of materials.
We have been in touch with JPMorgan Asset Management, and they spoke about Russia and the dependency in the west on certain commodities. Russia is responsible for 30% of the worlds Titanium production. This is likely to have an adverse impact on the aerospace industry. Palladium, which is significant for the semi-conductor sector is also heavily mined in Russia and Neon, also used in the same sector, is produced in significant quantities in Ukraine.
Gold has certainly been a beneficiary as it is inclined to be during times of conflict. However, we have little exposure to gold as it can be an inconsistent hedge and can experience significant price swings. Commodities in general can be very volatile which is why we have only recommended them for our higher risk portfolios.
Surely inflation will just get worse!
In certain parts of the economy this is certainly the case. Oil and energy prices are expected to rise further which will compound inflation problems. Russia are an important player in the global energy industry. They are the secondlargest producer of natural gas. Europe imports one third of its crude oil from Russia.
However, the thinking is that this will dampen consumer spending which will take pressure off other areas of the economy.
Central Banks will have to be adept around managing inflation. The markets are pricing in less aggressive interest rate hikes which has boosted stocks but particularly those that are sensitive to increased costs, like technology companies.
The timeframe, for when the peak of inflation occurs may well be prolonged and it wouldn’t be a surprise to see this push higher than previous forecasts. There are different types of inflation of course, and Central Banks are going to have to keep a careful eye on data. There is no doubt that they are now concerned about being too aggressive and dampening growth so much so that it tips economies into recession.
Sustainable investments should be a beneficiary
With the focus so much on supply chains and rising energy costs, this conflict reinforces the importance of countries having their own energy strategies. The emphasis on clean and renewable energy we believe will accelerate even more, with further investment expected into its infrastructure.
From an investment market perspective, Phoebe at LGT Vestra mentioned that those companies who use renewable energy are less likely to be impacted by rising oil and gas prices which makes them more attractive than their counterparts. Phoebe also reinforced that their Sustainable portfolios don’t have any exposure to Russian stocks.
Sustainable holdings have had a right old time of it of late, with many assets sold indiscriminately. Sentiment could well change in the short-term but there is no doubt in our minds that this will be a strong investment arena in the coming years.
We appreciate how this turmoil will have created anxiety, but it does reinforce how everyone should have a financial plan. As we always say “if you are planning to invest, don’t, until firstly you have invested in planning”.
Every client we have sat down with over the last two weeks, has been shown that they are still on-track to achieve what they want, despite recent market movements. It’s important to understand that this is short-term noise in the investment sense and in the context of your journey.
We know it’s not easy to bear, especially after the returns we were enjoying up until November. Our advice is to remain in situ and remember that when news flow is at its worst, it’s the wrong time to sell and the best time to invest.
Have a good weekend and try not to watch the news 12 hours a day. It’s not good for your health!
Gary and the Blue Sky Investment Team
P.S. I hope we are all reflecting on how lucky we are in this country. It could operate a whole lot better than it does, but boy are we fortunate!
Please Note: This communication should not be read as giving specific advice regarding your personal circumstances. This would only be given following detailed assessment of your individual needs. The value of investments may fall as well as rise; you may get back less than invested. Past performance is not necessarily a guide to future returns.