A Ukrainian serviceman walks past as fire and smoke rises over a damaged logistic center after shelling in Kyiv. Photo / AP
A Ukrainian serviceman walks past as fire and smoke rises over a damaged logistic center after shelling in Kyiv. Photo / AP
The shock invasion of Ukraine by Russia has added yet another risk to the long list of investor concerns.
Inflation, interest rate hikes, a share market correction – and now a war. While selling some investments or switching to a more conservative strategy 'until the coast is clear' might feellike the safest option in turbulent times, snap decisions can do significantly more harm than good.
While the current environment may feel grim, markets tend to climb as the wall of worries recedes.
An unsettling start to the year
The first two months of 2022 had already been troubling for investors, even before the turbulence caused by Russia's invasion of Ukraine. The list of concerns on investors' minds has grown significantly over the last six months, with the list of worries including:
• Persistently strong inflation • Central banks starting to lift interest rates • The end of quantitative easing • A share market correction (hitting tech and growth companies hardest) • The Omicron wave in New Zealand
Adding the Russian invasion to this list has ratcheted investor anxiety up even higher.
The risks posed by the Russia / Ukraine escalation
The Russian invasion of Ukraine is first and foremost a terrible human tragedy. The financial implications of the Ukraine conflict are also broad and worth considering - particularly given Russia's importance to energy supply.
Oil prices have spiked from $95 to over $110 a barrel since the invasion and this has implications for consumers in all countries. This comes at a time when inflation is already running hot and household budgets are under pressure. Another risk is to Europe's gas supply, 40 per cent of which comes from Russia.
A supply disruption could have significant impacts on Europe's industrial sector, and the economy more broadly. This is before considering the risk of the war escalating and extending beyond Ukraine.
The impacts of these risks depend on how far the conflict escalates. If it remains a narrow conflict, with no impact on the flow of energy, then the impact on the global economy may be limited. This helps explain the lack of initial reaction in financial markets to the invasion (US markets actually gained). The list of investor worries was already long, investors were already pessimistic and had already contemplated the risk of invasion – including scenario with more severe energy sector and economic implications. This pessimism was already reflected in market prices.
The risk du jour is constantly changing
The inflation debate and interest rate hikes likely have bigger long-term implications for the global economy and markets than the current conflict. Russia and Ukraine combined are less than 1.5 per cent of global GDP. That said, the situation in Ukraine is likely to be a bigger short-term driver of markets, either positive (if there was a ceasefire scenario), or negative. As a result, the news cycle and investor attention will be disproportionally focused on this conflict in the short term.
Ashley Gardyne is chief investment officer at Fisher Funds. Photo / Supplied
The risk du jour is constantly changing. While potential tail risks (extreme, but low probability events) like war and credit crises get a lot of attention in the media, the risks often never materialise or play out as badly as feared.
The table below shows the biggest area of investor concern each year since 2011, as measured by the Bank of America Global Fund Manager Survey.
Last year the biggest concern for investors was inflation. This year I'm willing to bet it is Ukraine. The US-China trade war loomed large for two years, but it did little more than create some mild market volatility in 2018 and 2019. The US market is up nearly 50 per cent since the start of the trade war.
The 24-hour news cycle makes it easy to focus disproportionately on these vivid issues. With the amount of news coverage they get, it can be easy to assume some of them are certainties, rather than just possibilities.
The narrow focus on tail risks can do more harm than good - causing investors to sell out of the market at the wrong time and miss out on the compound growth share markets have delivered over the long-term. Famed investor Peter Lynch captured this idea well when we said that "far more money has been lost by investors trying to anticipate corrections, than is lost in the corrections themselves."
In times of elevated uncertainty, it pays to zoom out and take a longer-term perspective. Over the decades share markets have provided great outcomes for investors, despite numerous military conflicts, credit crises and trade wars.
Looking at previous military conflicts can also help investors keep things in perspective. The table below shows how much markets have fallen in previous geopolitical events and wars. While no one would want to diminish the horror of these conflicts, the table hopefully helps investors look at this through a broad lens.
The average sell-off was 5.7 per cent, and it took just 16 trading days on average for the market to recover from these sell-offs. In the two Iraq wars (which are relevant given Iraq is a major oil exporter like Russia), the market fell 5-6 per cent from peak to trough, and took 2-3 weeks to recover.
Climbing the wall of worry
Markets are often said to climb a wall of worry. Markets become depressed when the list of issues is long and investors are pessimistic. However, when the risks are gradually resolved (perhaps simply through the passage of time) markets climb as the wall of worries starts to shrink. While it may feel counterintuitive – you want to be buying when the list of issues is long, not short.
Making snap decisions in the heat of the moment can be harmful for investors. Switching to a more conservative strategy when markets are turbulent or selling out 'until the coast is clear' can result in investors turning a short-term loss into a permanent one.
As always, we encourage investors to take a long-term view, select the right investment strategy for their risk tolerance, and then patiently stay the course.
Ashley Gardyne is Fisher Funds chief investment officer
