28 March 2022

The conflict in Ukraine and its impact on global markets

On the 24th of February 2022, Vladimir Putin ordered the Russian army to invade their neighbours Ukraine. Little else has occupied the news or held the attention of the world since then. The human element and suffering we see splashed across the news are foremost and unassailable in their importance when considering this conflict.

The political and economic shockwaves this has caused have reverberated around the world and with the western countries continued policy of using western banks to defeat Russian tanks, there are various financial implications that we may be faced with over the coming weeks, months and years.

So below, I have tried to answer some of the pressing questions you might have in relation to your personal finances:

What has happened to global markets so far?

The MSCI World Index, which tracks the global equity markets of 50 countries, has dropped by 12% since the start of 2022, when the looming threat of Russia’s ambition became apparent and was priced into markets. Whilst it constitutes a significant drop in the market, it is some way off what is deemed a market crash.

If anything, the main takeaway from the markets thus far is the importance of diversification. Separate countries, sectors and assets have all reacted wildly differently and the only real hedge has been to spread the risk across sectors and as globally as possible.

Should I sell down my investments due to the ongoing conflict?

No. There is a rather callous quote from Baron Rothschild that doesn’t bear repeating currently but the gist is that now is exactly not the time to sell down.

The market has already reacted to the events in Ukraine and by selling down now you would miss out on the subsequent correction. When looked at from a historical context this is borne out from other geopolitical events over the past 50 years, where on average any negative return has corrected and resulted in a positive return of +5% within 6 months and +9% within 12 months.

Should I be worried about rising costs?

Yes, rising costs are always a concern and the U.K.’s 12 month rolling measure of inflation just reached a 30 year high. As the financial sanctions start to impact global economies and the West moves away from Russian oil, prices are predicted to go higher still which will continue to put strain on income and cash savings. The best ways of dealing with this are:

  • Use any cash reserves in the first instance. This is exactly the time and place to use those ‘rainy day funds’ if needed, especially as inflation is having the biggest impact on your cash savings currently.
  • Stay the course with your investment strategy. Equities have historically provided the best protector of wealth against inflation and remain poised to do so again.
  • Reduce debt where possible. The normal economic solution to rising inflation, is for governments and central banks to increase interest rates; with the Bank of England already doubling the base rate from 0.25% to 0.5%. This will make the ongoing cost of servicing debt (such as your mortgage) significantly higher.

How would markets react if the conflict escalates to include NATO/Western countries?

This would really put us in unchartered territories and knowing how global markets would react to what would amount to World War 3 is hard to gauge. The closest point of reference would be looking at how markets behaved during World War 2 and data from global markets during that period is not thorough enough to provide a global comparison.

There is data from the S&P 500, which provided returns of:

1939 -0.4%

1940 -9.8%

1941 -11.6%

1942 +20.3%

1943 +25.9%

1944 +19.7%

1945 +36.4%

It might be of little concern should the conflict escalate that far, but it does show that wider conflict will not automatically plunge markets irreversibly lower.

What are markets predicted to do going forward?

Predictions or prognostications about what the markets will do over the next few years are of very little use. They rarely play out with any degree of accuracy and taking a short-term view to a long-term endeavour, such as investing, is proven time and again to cause adverse results.

The best piece of advice is to maintain your long-term view and is probably best summed up by Jack Bogle (founder of Vanguard) when he said “Stay the course. No matter what happens, stick to your program. I’ve said ‘stay the course’ a thousand times and meant it every time. It is the most important single piece of investment wisdom I can give you”.

Invariably there will be questions that have not been answered above but hopefully it has covered some points of concern and if you do have any unanswered questions to do with your personal finances, please do just reach out.

The author, Jonathan Young is a Financial Planner at Carbon Financial Partners.

The value of investments and the income derived from them can fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice. You are recommended to seek competent professional advice before taking any action.

Tax and Estate Planning Services are not regulated by the Financial Conduct Authority.

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