A look into the investment markets and how current events are effecting the stock markets both today and in the future.
Since Russia’s invasion of the Ukraine on the 24th February 2022 world stock markets have been in turmoil but our first and most important thought has to be for the millions of people whose lives have been so violently affected.
History shows that stock markets survive wars and present new opportunities for the investor but I think its important that we put everything in context – while we may be concerned about our portfolios we should remember that at least we are not living in fear for our lives with an uncertain future ahead of us – money is important, but it’s not everything.
When the invasion started we sent an email out to all of our clients confirming that the week before we had moved 95% of our portfolios to cash, in anticipation of a number of worsening situations with world economies and a fear of whether or not the invasion would actually take place.
We took this action to make sure our clients were in the best place to limit damage to their portfolios and then take advantage of opportunities should markets fall further over the coming weeks and months.
Until now, we have refrained from commenting on market action for a few reasons:
- With the horrendous suffering caused by the invasion of Ukraine by Russia, commenting on the market being up or down seems less important, when we know that eventually markets will always be alright, but some people’s lives will never be the same again.
- Stock markets across the world are incredibly volatile at the moment. We are seeing wild price swings in either direction throughout the day caused by news and anticipated news, so comment on what’s happening is pointless as the picture changes so much almost by the hour every day.
- The war in Ukraine is undoubtedly causing chaos in stock markets but world economies and stock markets had already hit some significant headwinds in January this year giving us many other factors to consider when making investment decisions.
So, taking everything we know now about the position in Ukraine and have seen how markets are reacting so far, it may be a good time to look at the wider picture and consider the possible effects of the war and business and economic conditions in general on stock markets.
Before the War
By the end of December 2021 we had seen a volatile year and an increase in talk about valuations. Many companies out there were trading at share prices that did not reflect either their earnings or their asset value. This is always the start of fear setting into the markets, many commentators were suggesting the Covid pandemic caused another Tech bubble like the one at the end of 1999.
In addition we had many months of worry about inflation – is it transitory or here to stay? -and even more talk about the prospect of rising interest rates.
Many investment professionals also worried about the prospect of global growth slowing as governments across the world reduced the financial support provided throughout the pandemic.
So you can see that, after 12 years of global growth in the recovery from the 2008 Financial Crisis up to 2020, we already had many disrupting factors coming in to play that would possibly, eventually lead to a global slowdown.
Following basic economic and business cycles, it was perfectly reasonable to expect a slowdown, possible recession and pullback in world stock markets. Of course, no-one ever knows exactly when this may happen or the extent of any market corrections.
The 2020 Covid pandemic caused a blip in stock markets, we saw a strong fall in March followed by a recovery in Uk markets that never quite recovered to reach the pre covid levels. So we arrived in 2022, about where we were in the beginning of 2020 with the addition of Inflation, Interest rate debates, fears over valuations and the added worry of how economies would fare without government stimulus.
During the War
As well as human tragedy, the war is having a number of significant other effects on world stock markets.
A large part of the worlds supply of Lithium and important other metals and minerals come from Russia and the Ukraine, fear of a reduction in supply is causing significant price increases and further fuelling inflation. This will also cause difficulties for Electric vehicle producers, reduce their ability to deliver cars and lower their sales. This may lead to workforce reductions in the short term, causing a general slowdown in consumer spending.
Russia and Ukraine are the worlds largest suppliers of Wheat/Grain so a cut in that supply will increase wholesale prices and follow through to increases in retail prices fuelling inflation further.
The reduction in oil supply is elevating prices, further fuelling inflation.
Reductions in Gas supplies are further elevating inflation, hurting the consumer
In times of increasing inflation consumers often pull back on spending or have less to spend on other goods due to rising prices in essential areas – causing a general slowdown in consumer spending, leading eventually to a recession.
Constant uncertainty causes institutional and retail investors to trim positions and investments to raise more cash to secure themselves against volatility and make sure they have enough reserves if the war goes on for a long time and affects near term market growth prospects. This causes prices to fall in general and often accelerates market selloffs.
We often see big down days in markets caused by algorithmic or computer based trading that simply follows a set of criteria input by programmers, regardless of the sense of such actions.
Until we gain some certainty of a resolution to the war, the volatility is likely to continue for some time.
After the War
When the resolution comes, markets will likely rise quickly for a short time on the euphoria of an end to the war. However, the length of time it takes to get a resolution and how bad things get until then will be a key factor in how big that rise may be.
With an end to hostilities, rebuilding and restructuring will begin and this will likely bring opportunity to global economies, but it will take some time to get essential supplies back in circulation so its not likely any economic recovery will be quick as we battle with rising inflation and interest rates.
Of course, unknown factors will affect the speed of resolution and economic recovery. The resolution that will certainly come will not likely see Russia welcomed back to the world stage any time soon and if we can’t find a replacement for Russian oil and gas quickly the pace of any recovery will likely be slow.
In Summary
We were most likely heading for a short recession before Russia invaded Ukraine. The war has accelerated the possibility of that happening.
Any recession we have is likely to be a mid cycle recession. Overall world economies are resilient and consumer demand remains optimistic and strong – people want to return back to the way we were before the global pandemic. This will hopefully mean any recession will be short, about 2 years at the most
Any recession affects the way you should invest – buy and hope will not work, whilst you have to take a long term view when investing, the world no longer rewards passive investors that take no interest in their investments. You need to be flexible enough to position yourself on the side of the markets that is in favour with the position we are in in the economic cycle.
For obvious reasons, energy is a good place to be at the moment but that won’t last when supply starts to come back on line again. Tech shares, apart from the main players like Apple, Microsoft etc are largely trading on potential again with share prices in excess of their true value so not all Tech is a good place to be at the moment.
It’s a stock pickers market and there will be some real winners over the next 24 months but markets overall are going to remain very difficult for a while, even after the resolution of the war, but by the end of 2024, we think that global growth is likely to begin to accelerate again.
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Our comments in this article are based on our view of global market and economic conditions at the time of writing. They are meant as an opinion and do not represent advice in any form. For specific advice about your investment needs please contact us directly to discuss your situation and requirements further.