The ongoing Russian invasion of Ukraine continues to dominate headlines, as military action intensified, and the resulting humanitarian crisis worsened.
Markets remained volatile, as investors assessed how the conflict was likely to affect global supply chains. By Monday, the price of a barrel of oil had topped $130, adding to the pressures around the cost of living. Russia is an integral supplier of both oil and gas to vast swathes of Europe. Concerns of major supply disruption and fears of a potential Western embargo on Russian oil and gas exports has impacted broader market sentiment and increased concerns around the rising cost of gas in Europe and the UK.
As well as fuel, Russia and Ukraine are major global suppliers of commodities such as copper, wheat, nickel and neon. A rise in the price of these commodities will lead to increased inflationary pressures. Central banks were already contending with rising interest rates caused by the COVID-19 pandemic, and so the events in Ukraine will likely have further complicated this issue.
Equity market retreats across Europe were broad based as investors assessed the implications of the Ukrainian crisis. The German DAX and French CAC40 slumped by -10.1% and -10.2% respectively. Mark Holman, Partner at TwentyFour Asset Management, noted European banks were among the hardest hit, as fears of losses prompted many to reduce their holdings. However, he noted: “While this natural risk aversion is logical in the current market, we do not think it is fundamentally well supported, and should eventually present investors with an opportunity. We are confident that Russian and Russia-related exposures are not about to overwhelm the European banking system.
According to Holman, Russian and Russia-related exposures at European banks are extremely low – they are estimated to be less than 1% of total exposures across the sector.
UK markets were not quite so severely affected by the events in Ukraine, however the FTSE 100 still fell by 6.7% over the week. Performance was not even – for example defence stocks performed better than banks and retail type companies. Overall, it appears investors have reacted to events by shifting further into less risky assets.
Whilst volatility reached its highest level for more than a year, US equities were less affected. The S&P500 declined by -1.3% with falls in the technology and financial sectors offset by strength in other segments.
Schroders commented: “Beyond these events [in Ukraine], the US economic picture remained broadly unchanged. US growth continues to look robust while inflation is elevated. Most areas of the market struggled in February. Energy was the only sector to make gains, with oil and gas prices increasing steeply. All other sectors declined. The tech and communication services sectors were among the weakest.”
The end of last week also saw the US release its latest payroll data, showing a continued fall in unemployment.
Looking ahead, it seems the geopolitical outlook is volatile and uncertain. Mark Dowding, Chief Investment Officer at Bluebay, commented: “There is a sense that we may trade from headline to headline. Yet, much as we might dearly want to see the plucky heroes in Ukraine prevail, or Russians rise up and depose Putin, there may be a sense that a grinding campaign of devastation appears the most likely outcome for now, given the overwhelming military superiority in Russia’s favour, much of which it has yet to deploy.”
According to Joe Wiggins, Director of Liquid Markets at St. James’s Place, as we can’t predict the future, or how markets will respond to large macro events reliably, investors should bear in mind the old adage of ‘time in the market, not timing the market.’
He said: “It is not that macro events are never significant for markets. There will be incidents in the future that will lead to savage losses in equities; we just won’t be able to predict what will cause them or when they will happen. Trying to anticipate when they will occur, rather than accepting them as an expected feature of long-term investing, will inevitably lead to worse outcomes.”
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