Market Update – 23rd February 2022.

The dominating news story this week is the unfolding situation in Ukraine.

Russia aims to send troops into two regions of Ukraine, Donetsk and Luhansk, which Vladimir Putin has claimed would be a peacekeeping exercise – with both regions being largely pro-Moscow, he has identified them as independent separatist regions. Whilst any risk of war is truly a humanitarian crisis, and risk to life on any level is horrifying, we believe the turbulence we are currently seeing in markets to be short term.  One must remember it is likely that Vladimir Putin has largely played a tactical move, and is not likely wanting to risk war, and this is why he has announced a peacekeeping exercise in the only two regions that not only give him land access to Crimea, but also that will offer little to no resistance, likely minimising military frictions.

Putin’s tactical move can be seen in the reactions of the west. With Russia building up financial reserves over recent years, it has been made clear by Putin’s aids that economic sanctions were expected to be rolled out against Moscow should they make any move on Ukrainian territory. That being said, Putin is aware that reserves can’t insulate the Russian economy over the long term, so will likely avoid a move any further into Ukraine. In relation to what has already been announced, Europe and the UK have rolled out sanctions, and Olaf Scholz, the Chancellor of Germany, has put a halt to Nord Stream 2 progress.

The US, who have long been against Nord Stream 2, have added to the sanctions to deter Russia from invading, including preventing Russia from trading in western debt markets, essentially preventing them from raising capital in Western Markets or indeed trading in its new debt.

Given the gravity of the headlines, whilst we are certainly not ignorant to the risk to human life, it remains apparent that the perceived ‘light touch’ to sanctions imposed by the west, and the reiteration by Putin that he is willing to negotiate peacefully, suggests markets have priced in yet another short-term hurdle.

Again, whilst we do not want to make light of the frictions – it is concerning that if tensions between Russia and Ukraine were to escalate, it has potential to cause human tragedy. However, the volatility and noise in the markets presents a buying opportunity in markets. For example, whilst S&P 500 closed down over 1% yesterday alone, we will be looking to buy the dip over the coming days.

Whilst the price of a barrel of Brent Crude oil remained relatively flat on the developments (suggesting that any tension impacting the supply of oil is discounted), we saw some volatility in equity markets, as investors trade on each news headline. However, geopolitical tensions don’t generally have anything other than a short-term, knee-jerk reaction to equity markets (unless they have a direct economic consequence). For example, in 2014, we saw Russia invade and annex Crimea, with little to no reaction from equity markets.

In fact, a potential policy error from central banks would pose more of a risk to equity markets in the near-term. Central banks globally will be cognisant of the unfolding situation between Russia and Ukraine when making monetary policy decisions, and will be sure to act with caution. In addition, whilst we remain adamant that supply chain constraints will indeed ease, reducing inflationary pressures, clearly the current sanctions will likely prolong energy price pressures until a resolution is found but with that in mind, central banks will likely lean on their data dependency, as they have stated many times, which will likely add an air of relief to markets.

Whilst we feel that it is imperative that we share our thoughts on the unfolding situation in Ukraine and how it impacts the portfolios, we are looking beyond the volatility, as we continue to believe markets are well placed for strong equity performance over the medium to long-term.

The Investment Management Team