While the humanitarian crisis in Ukraine is the most troubling element of the Russian invasion, investors will naturally be worried about the effect the war will have on their investments. What course of action should you take?
Geopolitics and market volatility
In our interconnected world, it is clear that the tragic events unfolding in Ukraine will have an effect on the markets. Market volatility in response to what is happening in Eastern Europe was always to be expected.
It should not, however, be cause for panic. A key message from our investment partner, Tilney shortly after the war broke out stated that ‘Historically, the market’s response to geopolitical events tends to be short-lived. Our analysis finds that, on average, losses resulting from geopolitical events are erased within one month.’.
Indeed, financial markets have already calmed significantly as the world has united against Russia, imposing severe economic sanctions in the hope of choking the Russian economy, and fierce resistance within Ukraine has significantly slowed Putin’s progress.
Nevertheless, the war is unlikely to end soon so continued volatility in the short term seems inevitable, especially as the Ukraine situation isn’t the only issue currently affecting the markets. Multi-decade high inflation and the removal of accommodative monetary policy were already proving to be a challenge to the markets even before the Russian invasion.
What will happen next in the markets?
As tensions ebb and flow over the course of 2022, investors should expect further volatility. EU officials announced harsh sanctions on Russian natural gas and plans to achieve energy independence from Moscow ‘well before 2030’ to ramp up the pressure on Putin. In addition, seven Russian banks have been removed from the SWIFT system, although those handling energy payments remain.
When the Russia-Ukraine conflict first started on 24th February, Tilney outlined three potential scenarios that could play out. The extent of the invasion and these recent measures effectively mean that scenario three is the one we are witnessing. It is expected that the fallout of sanctions on energy exports will directly impact purchasing power, investors’ risk appetite, and household/business confidence.
How the oil shock could impact the global economy
Should I get out of the markets?
Clearly this is a time of great uncertainty about the future of Europe and uncertainty always destabilises global equities. When markets suffer big losses, the temptation for investors is to pull out. Perhaps you are considering selling your equities?
Don’t do anything rash. The advice from Tilney as I write is to maintain current equity exposure. That effectively means that the best course of action for investors right now is to maintain a well-diversified portfolio to spread risk and avoid making any panic-led decisions in response to rolling news. Knee-jerk reactions are rarely rewarded.
And if you invest via Tilney, as the majority of our clients do, be reassured that they are monitoring the situation closely and will be ahead of the game if the time comes to take action in response to the unpredictable geopolitical events we are currently witnessing.
You can read Tilney’s full investment commentary here.
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