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Global markets to 25 February 2022

First inflation… now an invasion

On Thursday morning, the world awoke to the news that President Putin – despite numerous assertions that he had no intention of invading – had finally crossed the border into Ukraine’s “independent republics” Moscow’s actions were taken despite warnings from US President Biden and UK Prime Minister Johnson, alongside other NATO members, that severe sanctions would be slapped on Russia were military action to be taken.

Initial reactions on global stock markets were inevitably negative. Prior to Thursday’s events, financial assets had been suffering from the aggressive rise in inflation, and ongoing speculation that the US Federal Reserve Bank had “let the inflation genie out of the bottle”, leaving them no choice but to slam on the brakes by implementing a more aggressive monetary policy tightening programme.

Sanctions have indeed been implemented in response to Russia’s invasion of Ukraine. But interestingly, Biden has not thus far excluded Russia from the SWIFT international financial transaction system: apparently, that was “not a position the rest of Europe wanted to take”.

How much will sanctions really hurt Russia?

That said, a closer reading of measures adopted by the US reveals that it is going to exclude Russia’s biggest banks from the system in a way that approximates what would happen were it to be booted out of SWIFT. But still, these sanctions do not touch vital necessities – such as oil and agricultural products. So these goods – which Russia most needs to sell and which Europe most needs to buy – remain unaffected. Neither the European Union, nor indeed much of the Russian economy will be harmed by the international community’s actions so far.

One of the biggest sticking points in all of this is obviously energy. While the UK is not tethered to Russia by any meaningful dependency on the gas that it produces, the same cannot be said for countries such as Germany which are significantly more reliant on it and so strongly opposed to any aggressive sanctions at this point. Unfortunately, we still do not have access to enough in the way of alternative energy supplies – such as renewables. And for most of this year, the market appears to have had little appetite for investing capital in clean energies (given the strong rise in the share prices of fossil fuels such as oil and gas).

The result is that at first glance, the US’s sabre rattling sanction exercise seems somewhat symbolic. Indeed, if you take energy out of the equation, Russia’s economy can most likely withstand sanctions fairly well. Admittedly, its stock market and currency have taken a beating. But many of the investors who have been affected by those developments are not Russian nationals. And as for the few who are, they are most likely to be oligarchs who have already been singled out by Boris Johnson.

Bear market or recession?

The question now is whether the situation in Eastern Europe combined with the problematic inflationary backdrop that we already have will leave us with a bear market… or whether we are already on a path that will lead us to recession. The latter should not be excluded: if the crisis worsens and crude oil and gas prices continue to spike up, then all bets are off. It’s worth noting that we have already seen agricultural and base metal prices soar over the last few days in reaction to growing geopolitical uncertainty in Eastern Europe.

Formulating any short-term predictions is extremely difficult. This war is barely 48 hours old, and Putin’s endgame remains highly unclear. If indeed it is – as certain commentators have suggested – to recreate the former Union of Soviet Socialist Republics, then the world will be faced with significant long-term uncertainty, not to mention the likelihood of further invasions.

Corrections are just… part of life

Although there is much evidence to suggest that we are about to endure another period of cold war between Russia and China on the one hand, and the West on the other… the reality is that today’s world is more unpredictable than ever. In the midst of all this unpredictability, it’s worth remembering that since 2009 alone, the financial markets have suffered 73 panic attacks. These have been triggered by everything from economic and geopolitical upheaval to – more recently – pandemics and all the uncertainty associated with the emergence of new variants. Each time, the markets have more than recovered from the correction in question. This week, the markets are enduring their 74th such event. The outcome is unknown, but historical precedent is unquestionably on our side.

However, from a client and investment perspective, there is no denying that we have seen a significant pullback in the markets. Not just this week… but indeed for most of this year. And it would be foolish to exclude the possibility of further short-term downside risk. What is interesting, though, is that on the day that the tanks rolled into those self-proclaimed states within Ukraine’s borders, Wall Street fell but then actually closed up on the day following a stunning turnaround in trading. Indeed, cries of “USA, USA!” were said to have been heard being bellowed across the stock exchange floor.

Lives have already been lost and there is every likelihood that the humanitarian crisis that is about to unfold will dwarf anything that we have seen in Europe since the Second World War. It was just as that war was in its final stages that Churchill said “never let a good crisis go to waste” – referring to the unlikely alliance forged between himself, Stalin and Roosevelt that would eventually lead to the formation of the United Nations. Clouds may once again be gathering, but we should never stop looking for silver linings. We should always try to turn negatives – even appalling ones – into positives, seeking out opportunities in the midst of what is indeed – inescapably and incontrovertibly – a major crisis.

But the markets will endure

In no way are we undermining the seriousness of this conflict. We are simply pointing out that the markets are – on the whole – resilient and have survived everything from the 1962 Cuban Missile Crisis to the 2000 dot.com crash. We are financial planners and wealth managers. It is our job to seek out opportunities and make decisions in all circumstances. Be reassured that we have confidence in our ability to navigate through these trying times. It goes without saying – but shall be said nonetheless – that we are here for you, our clients. We will always listen to your concerns, talk you through our reasoning and provide you with support when it is needed.

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