In light of the outbreak of further hostilities in Ukraine, I thought it might be useful to share out thoughts on what investors may expect.
The first thing to note is that todays market sell offs are to be expected in the light of the news, but that whether they are short lived or longer lasting will only be determined by what happens next.
Putin’s tactics in previous incidents, such as Georgia and Crimea, suggest that any action will be short lived and although not impossible, will not lead to all out war. This should mean that in the short term, markets will return to normal trading, and the attention will be on the longer term implications.
What the rest of the world will do to Russia going forward hangs on what sanctions are imposed. The West will not be sending troops to fight the Russian army but will impose varying degrees of financial pain on Putin and his allies. All out war would lead to severe economic problems for Russia, and this is why it is considered unlikely. More likely is a series of sanctions that stop short of completely cutting the country off from global capital, energy and banking markets, inflicting financial pain that Russia will feel but can absorb.
The problem of course is that Europe receives 40% of its Gas supplies ( UK 3%) from Russia, and in a time of higher energy costs, many western governments will not want those cut off, and the Russians probably couldn’t afford to stop selling Gas either.
This to us is the main problem. The action taken by Russia and any sanctions imposed are likely to lead to higher inflation, at a time that most western economies need to reduce inflation. This could have the impact of higher interest rates and therefore slower growth, and that is the main threat.
Protection for client portfolios is achieved by holding diverse asset classes and a good geographical spread. This cannot protect against any falls in markets, but gives the best chance of reducing losses and taking advantage of gains as and when markets rise again.
Obviously, we have no more idea than our clients as to what Putin is thinking of doing next, but our base case is to stay invested at the moment and ride out what will hopefully be a short term storm.