The past month saw the inflation story being firmly pushed off the headlines and replaced with what is unfolding in the Ukraine. The decision by Putin to invade has been a game changer in the global geopolitical landscape and has galvanised antagonism at national and multinational level around the world. While the initial sanctions announced might have been interpreted as relatively mild, and bearable, by Russian authorities the game has ratcheted up quite a bit since then. The current and planned sanctions on Russia’s banking and financial systems will be felt by every Russian citizen.
Predictably, financial markets have responded negatively to these developments. Markets hate uncertainty and there is plenty of uncertainty to go around in relation to how the Ukraine scenario will ultimately play out. While Russia is not a major player in global trade, it does supply more than 10% of the world’s oil and a massive 35% of Europe’s energy needs. In addition, the Ukraine is a major food producer and exporter. As a result, the economic impact will be most keenly felt in Europe and this view is reflected in the fact that continental European equity markets have fallen most over the past month.
Europe, and many other parts of the world are now facing the prospect of stagflation, stagnating economies combined with rising prices driven by shortages. If there is some kind of a silver lining it is that the brakes will be applied in terms of possible interest rate rises.
Major Equity Markets Year to Date (in euro terms)
As can be seen in the table below, all equity markets fell in February, and we would expect that bouts of volatility will be a recurring event for quite some time yet as a early resolution of the Ukraine situation seems highly unlikely. As usual, when the backdrop is uncertain like this our advice to investors in equities is to hold firm. For longer term equity investors, these market shifts will produce value opportunities which should enhance returns over time. For those looking to commit new funds to the market now, our strong advice is to phase their investments over a period of months.
Equity Market Performances (in euro terms)
|Market||Performance February 2022*||Performance 1 year*||YTD*|
*Source Financial Times, Financial Express
The recent events have given Central Banks pause in relation to their plans to raise interest rates. We would still expect rates to be increased in the US this month, most likely by 0.25%, but further rate rises over the course of the year are likely to be very measured. In Europe, any possible rate rises this year is almost certainly off the table. As a result of the shift in the outlook, bond markets have been quite stable over the past month, and this is likely to remain the case for a while.
Unless there is a very serious deterioration in the European economy, we do not anticipate that the outlook for property as an asset class will change materially. We continue to see property as a strong source of reliable long-term income and the change in the interest rate outlook may well be supportive for the asset class.
Because Russia is such a large producer of oil and gas, as well as several other commodities, the commodity sector has been front and centre as a result of the recent events. The oil price has risen to $110 per barrel and other commodity prices have followed. Many commentators are saying that a rise to $150 per barrel is very much on the cards. For those who might be inclined to take a position on oil, our Fund in Focus this month is the Brent Crude Oil ETC (see below). An inevitable outcome from this current oil crisis is the acceleration of renewable energy programmes across Europe with potential benefits for investors.
In the midst, as we are, of a high impact event for markets, the short-term outlook for investors is murky at best. However, as history has taught us again and again, the best outcomes are achieved by looking through the current scenario and focusing on the potential for investment assets to deliver long term value. This particularly applies to equities which we believe are attractively priced currently and have the capacity to produce very good returns for investors over the longer term.
Our fund for this month is Brent Crude Oil ETC Click here to see more details
As always, you should only consider the investment views contained in this Market Insights update in the context of your own attitude to risk and how such choices might impact your Asset Allocation model. Should you wish to discuss your investment portfolio, please contact Harvest Financial Services on 01 2375500 or email email@example.com.
This marketing information has been provided for discussion purposes only. It is not advice and does not take into account the investment needs and objectives, financial position, risk attitude, liquidity needs, capital security needs and/or capacity for loss of any particular person. It should not be relied upon to make investment decisions.
Warning: Past performance is not a reliable guide to future performance. Warning:
The return may increase or decrease as a result of currency fluctuations