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This update was written on 23 February 2022 and, as we know, the situation in Ukraine is evolving rapidly. We will keep you updated with any significant market updates as they occur.
Trouble to the East
Much of the market difficulties faced so far in 2022 can be attributed to higher inflation and expectations for a short but relatively aggressive monetary tightening cycle from the Bank of England (BOE) and US Federal Reserve (Fed). Clearly, the rapidly evolving situation in Ukraine is exacerbating market worries and volatility has infiltrated most areas of financial markets.
Bond markets have been struggling as inflation reduces the purchasing power of their fixed income streams, making them less attractive. Thus, prices fall and even the “safest” of bond markets, i.e. government bonds, are down over 5% year to date (based on the UK Gilt All Stocks Index).
A broad measure of the US stock market, the S&P 500, closed in correction territory on Tuesday 22nd February for the first time since the onset of the pandemic in March 2020. As a reminder, a correction is widely accepted to be a fall of 10% from the most recent high point of the index.
A relative bright spot has been the UK stock market but, as the Avellemy CIO Graham Bentley, recently pointed out, the relative strength of the UK market has been led by just a few of the largest companies, predominantly energy companies and banks. Looking at the wider market, medium sized companies, as measured by the FTSE 250, are down 10.60% year to date and some of the smallest companies, the FTSE AIM 100 index, are down 18.00%.
What could be the effects of Russian invasion on financial markets?
With many investors seeing drops in their portfolios for the year so far, the natural questions are what are the likely effects on financial markets should the tensions in Ukraine escalate further and what should we do about them?
Firstly, I do not wish to underestimate the human cost of any potential conflict. The situation in Ukraine is clearly very serious and further incursions into Ukraine by the Russians will have a lasting impact on the Ukrainian people.
However, it is worth bearing in mind that geopolitical events have, historically, caused periods of heightened volatility which tend to be relatively short lived. Even after 9/11, the terrorist attack on the World Trade Centre in New York, the S&P 500 had recovered into positive territory just six weeks later.
Aside from the inevitable volatility we see a couple of key risks:
What should investors do?
Periods of volatility and falls in the value of portfolios are, whilst deeply uncomfortable, to be expected.
When one sees falls in value, it is all too tempting to make changes. As humans we want to do… something. However, the most successful investors exhibit the following traits:
If in doubt, contact a trusted professional
Finally, if you have any questions or are unsure of what to do under the current circumstances, do get in touch with your financial adviser of investment manager. They will always be happy to help and talk through your options.
Until next time, stay well.
Our Financial Advisers are available on the phone so please contact us if you have any questions.
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