Geopolitical conflicts such as the Russian invasion of Ukraine have a direct impact on investment portfolios because of the tragedy and fear they produce. Markets do not like uncertainty and will enter a phase of extreme volatility. This often creates panic among investors, but it is important to keep in perspective that, historically, conflicts are eventually resolved. We are hopeful the Ukraine people will see safety sooner rather than later.
Here we share our viewpoints on some commonly asked questions from investors:
How Significant is Russia to a Portfolio?
- Russia is a very small segment of the international investment markets.
- Russia is considered an emerging market. Of the FTSE Emerging Market Index, Russia only represents 2.9%. This figure is expected to decline given sanctions and company withdrawals from Russia.
- A diversified portfolio with modest exposure to Emerging Markets likely holds nominal exposure to Russia.
How Might Russia’s Invasion of Ukraine Affect Investment Markets?
- The conflict has impacted global markets. Stock markets have declined, while bond markets have improved.
- The damage to the world economy from sanctions should have little impact beyond Russia, although an extended conflict could have minor repercussions.
- Inflation could be the primary impact if energy prices continue to rise.
- While geopolitics may drive market returns in the short-term, economics drive markets over the long-term.
- Fortunately, many countries are continuing to report significant economic rebounds.
How Does This Impact Inflation?
- The current situation will likely drive inflation higher.
- The above said, many energy flows from Russia remain open, mitigating some of the energy price impacts.
- Some elements of higher inflation will likely persist as companies extract from Russia. BP and Shell are pulling out of energy investments, GM is stopping auto exports, etc.
- Current inflationary pressures are negatively impacting investments. However, both stocks and bonds have historically outperformed inflation over time.
How Might the Russian-Ukrainian Conflict Affect the World?
- In the current environment, we do not see direct war fighting efforts expanding beyond Russia and Ukraine.
- NATO members are providing funding and resources, but they have stated that they do not plan to engage their militaries or enforce no-fly zones.
- How the current situation will impact world orders and relationships is still to be determined.
How is SageVest Responding to Market Changes?
- As part of our disciplined approach, we don’t believe in, nor do we recommend making shifts in long-term investment objectives. Doing so would be trying to time the markets.
- As several indexes fall into correction territory, potential stock purchases might be appropriate to maintain your long-term investment strategies. Buying on market dips can capture long-term investment opportunity.
How Might Stock Market Declines Impact Your Finances and Financial Planning?
- Long-term, we are not expecting significant impacts.
- Your financial plan should include testing the impacts of negative returns periods as part of Monte Carlo simulations. These look at the impacts of plan results over a variety of market performance structures over time. A plan with a high probability of success is likely able to weather stormy periods.
SageVest serves as a true wealth manager, helping clients to overlay investment decisions in light of their long-term growth requirements, liquidity needs, and risk tolerance. This approach to financial decision making helps to give you confidence and clarity about your investment decision making. Please contact us to discuss further.