The Investor’s Guide: What’s Happening in Markets. 14 March 2022

Like all of you, we continue to be shocked by Russia’s ongoing war on Ukraine and my thoughts are with those whose lives have been so grossly affected. Indeed, the international public response across Europe to assist those caught up in this conflict has been extremely heartening but much more will be needed to assist these migrants.

Notwithstanding the immense pain and suffering being experienced by our fellow humans, and unlike migrant issues of recent years in Syria, Ethiopia, Myanmar, Iran and Iraq the fact that a war is on Europe’s doorstop has brought a further focus by many Western economic commentators.

A ThrowBack To The Russian Empire or Shades of Afghanistan?

In the times of Catherine The Great in the late 18^th century (recently portrayed by Helen Mirren in Sky’s mini-series) Russia’s power extended as far south as Crimea, to the west with the Polish–Lithuanian Commonwealth and in the east it became the first European state to colonise Alaska, establishing Russian America.

While general Western opinion is that Russia would not dare to encroach on the NATO alliance countries it is of cold comfort to Poland, Lithuania, Latvia and Estonia which are now on high alert in the light of Russian history. This has been raised to a new level of concern with the missile attacks on Western Ukraine, only 15km from the Polish border.

Over a 10 year period in their Afghan invasion, the Russian army suffered 15,000 deaths. In a little over 2 weeks into the Ukrainian invasion the same mortality rate has been reported on the Russian side as well as the deaths of several high profile commanders and generals. The Blitzkrieg tactics that worked over a 5 day period in Georgia 8 years’ ago have not worked this time with Ukraine due to its larger size and better military capability. To maintain his authority within Russia Putin needs a decisive victory, and quickly. Otherwise his media control will not save him from a general unease especially as global sanctions bite into day to day living with the sudden rise in Russian inflation.

This has led to weekend US reports of China being asked by Russia to supply it with military aid. If true, the war footing and, indeed, the global impact may well escalate to a different level. This concern has now spread to China directly with its stockmarkets falling between 3% and 5% on Monday’s trading.

The Ongoing Impact On Markets

The conflict continues to have ramifications on global pricing of many commodities which in some instances has continued a trend over the last year.

The impact on Wheat and Corn plays into the production costs of food directly and while it exerts inflationary pressure in the Western economies these price increases are likely to have a far bigger impact on Third World countries’ economies. Record high natural gas prices have forced producers of fertilisers to curtail their production of ammonia and urea in Europe to 45% of capacity causing expected serious knock-on effects for global food supplies. A 50 cent increase in the price of an high end bread from, say, Tesco or Marks & Spencer might be commented on in Ireland and the UK. In less developed Arab economies it has led to the Spring uprising in the past. Could this type of foment happen again in other Arab countries? If it does, then the world order could change again.

You may also have heard of a 250% in the price of Nickel. This came about not because of a supply and demand issue in the physical metal but was due to a stock market options contract by a large Chinese investor who found himself on the short side of a trade. The price will most likely fall back once the trade position date has passed.

Of more immediate importance and what does certainly impact the view of Western economies is the price of oil. This commodity is key to everything we do – the cars we drive, the public transport we take, the heating costs of homes and businesses (irrespective of the long term Green agenda) as well as the distribution of finished goods and the travel costs of tourism. It is of major concern to stockmarkets and this has been reflected in the inverse relationship between shares and the oil price which is very obvious from the graph below showing recent movements.

Last week’s announcement by the Irish Government to forego inbuilt energy related tax increases has already been absorbed by further market price rises and is not a viable long-term option to keep voters happy. In the same vein don’t expect any other “Helicopter Money” similar to the “PUP” payments. Such monies still need to be repaid as these were financed by long term Government Debt that will have to be serviced by tax increases irrespective of politicians saying otherwise. This will only further fuel inflation. The “Helicopter Money” brings with it a separate inflationary risk.

Overall, the jury is still out as to what the world’s Central Banks or governments will do to react with the inflationary risk from commodities especially as they try to anticipate whether it is a long-term trend or something that might pass in the coming months. The long distant past playbook of Central Banks was to raise interest rates in times of high inflation to choke off consumer demand. This current crisis, however, has echoes of the oil price surge of the 1970s which led to long term high inflation over almost two decades. Many of those now seeking to put their foot on the housing ladder only know low interest rates as the norm. Their parents can remember interest rates of 18%+.

International bankers Goldman Sachs own economists last week opined that there is a 35% probability of a global recession in the next year. This view is based not only on commodity price inflation but also the knock-on effects on global businesses, especially small businesses, being put under pressure even where there is no Russian connection to get caught up in. In times of economic stress, businesses and consumers tend to restrict spending until more certainty abounds. The latter is unlikely to occur for some time to come even if peace were to suddenly break out.

Don’t Forget Covid!

With all of the coverage of the Ukraine situation Covid has almost been overlooked. Last week China reported its highest infection numbers in two years and Ireland has seen a dramatic jump in hospitalisations. The issues of staffing shortages and hybrid working continue to effect economic output. In our own dealings with Irish financial institutions it is not uncommon for processes that took a week to conclude now not being dealt with by them, if at all, until the passage of 6 or more weeks. This is not just an Irish phenomenon and does not only apply to service industries. Physical productivity and creation of goods are also affected worldwide.

Where To Now For Stockmarkets?

As we stated in our last newsletter, stockmarkets have always been driven by geopolitical events with initial negative reactions swift and, in many cases, recoveries happening also relatively quickly. Looking at the long-term trends it is really important to reflect on the fact that while the Ukrainian Crisis is foremost in our minds now a lot of similar market impacting events have occurred even in the last 25 years. The graph below is a good summary of such events.

As with weather changing throughout the seasons, markets go through cycles of good and bad periods and all long term investors should expect to see this happen. Market corrections (a correction is defined as a decline of 10% or more) and bear markets (a decline of 20% of more) are regular events. Equity markets give a positive expected return above less risky assets such as cash deposits because of this volatility. It is the long-term price that investors must pay in order to reap the rewards of positive expected growth over time.

Our General Advice Can Be Summarised As Follows:

1. If you are looking to move house, buy a house for the first time, intend to refurbish your home then the immediate future might be a good time to consider locking into long term fixed interest rates.
2. If your targeted retirement age is more than 10 years away (and many of our clients’ retirement dates are at least 20 years away) then the recent volatility is no real concern as these falls in value are broadly regular occurrences, albeit that most such falls don’t have the dramatic background of the current Ukraine Crisis.
3. If you are continuing to make, say, monthly contributions to your pension fund then the next few months will be an opportunity to invest at cheaper fund prices than in the immediate past.
4. Similarly, if you are not likely to need access to investments in the next 7 or 8 years then hold tight and the market will recover.
5. For our clients who are looking to retire in the next few years we have always advocated that you have sufficient cash either in your pension account or on hand in a personal account to smooth over downturns such as those experienced in the last few weeks.
6. Similarly, if you have retired, we have always made it a priority that our clients hold at least three years’ expenditure in cash so as to provide personal liquidity for emergencies and not need to cash out from their post retirement funds.
7. Finally, if you have cash deposits that are not needed for liquidity or emergency funds then the next few months will be an opportunity to consider making long term investments.

Need Advice Now?

We are very happy to meet with you and assist you in understanding how the current crisis impacts on your personal borrowings, investments and pension funds. We’re here to help and to make sure that your personal financial planning stays on track so that you and your loved ones have a secure future.