Hot on the heels of the COVID-19 pandemic, the war in Ukraine is yet another sobering human tragedy. This time, one that is entirely avoidable.
It has also been described as a catastrophe for the global economy. At a time when markets were already reeling from the massive disruption caused by the pandemic, the war could hardly have come at a worse time.
Russia and Ukraine are major suppliers of fossil fuel and food stuffs, especially grains. The combination of economic sanctions imposed on Russia and devastation inside Ukraine has hot supply in these commodities hard, driving up prices. This has further fanned the flames of high inflation and sent shockwaves throughout the economy.
Naturally, the stock markets have felt the heat, too. More than £1.5bn was reportedly taken out of stocks and shares in March alone. Sharp (and in some cases record) daily and weekly falls have recovered ground only to drop again.‘Safe bet’ investments like gold and government bonds have in the meantime been doing a roaring trade.
Instability in the stock markets has as much of an impact on personal finances as big rises in energy and fuel prices. In fact, if you take the long-term perspective, probably more so. Pension funds are invested on the markets and a major downturn in performance over a sustained period of time could leave people’s plans for later life in tatters.
Similarly, if you use investments as a key vehicle for income and wealth generation, you are directly exposed to the current volatility.
So what are the prospects for personal investments and pension funds looking ahead?
More pain to come
In a recent investment update, Fiducia Wealth made the point that the inflationary pressures we’re seeing at the moment are unlikely to ease any time soon. Between them, Russia and Ukraine supply roughly 25% of the world’s wheat supply, the third biggest agricultural product globally. We’re unlikely to see the full impact of sanctions and disrupted supply on wheat prices until after the harvest season later this year.
A subject being discussed more prominently at the moment is the standoff around Russian gas. Moscow has started to switch off supply to European countries who refuse to pay in roubles, a measure introduced by the Kremlin in retaliation for sanctions which have cut Russia off from foreign currency markets.
While the UK government has sought to play down its reliance on Russian fossil fuels, figures show that the country has bought more than $30bn worth of oil and gas from Russia since 2014. It would be naive to think that the UK will be immune to any ill effects from losing this line of supply and we can expect further energy inflation.
Little direct exposure for investments
While stock market volatility is never ideal and can always claim a high-profile victim here and there, the point remains that investment markets are designed with long term stability in mind. Mitigating uncertainty and risk is part of the process.
As far as investment exposure to Russia is concerned, Russia has not been the focal point for many specific investment funds because of long-term underachievement of its domestic economy. According to Morningstar Direct, as of January 2022, Russian equities made up just 0.27% of long-term European assets in funds and exchange-traded funds. The few that did exist have now been closed and the funds divested elsewhere.
It’s more likely that your pension is exposed by holding funds in Russian sovereign debt or Russian companies like Gazprom. These will be affected by sanctions, but on a defined benefit scheme, you can expect no impact to your returns as it is up to the fund managers to offset losses in other markets. You may find the value of a defined contribution pension lowered because it holds stakes in western companies who have had to take a hit in exiting their operations in Russia.
As investment managers, our role at Fiducia Wealth is to continuously review our client’s portfolios to strike the right balance between risk and reward, adjusting the spread of investments when risk profiles change to hedge against them. In the current climate, we will look to real assets such as property and infrastructure investments as vehicles to protect against inflation, as these assets usually grow in line with inflation. Of particular interest in this area is how soaring energy prices and volatility in fossil fuel markets will influence investment in sustainable energy. This could be a real growth market in coming years.
One final thing we would say is that the evidence from history is that investment markets invariably return to growth following periods of geo-political upheaval. As already stated, part and parcel of investment management is planning for fluctuations and taking the long term view. We certainly wouldn’t suggest letting current events put you off investing for your future.
As your local specialists in wealth management in Colchester, we’re always happy to explain what investment planning can do for you, or talk through your pension options. Get in touch today to find out more.
