Keep your goals in sight as markets react to Ukraine and other threats

Laura du Preez | 23 March 2022

Laura du Preez has been writing about personal finance topics for more than 20 years, including eight years as personal finance editor for two leading media houses. 

“Ukraine conflict may knock $1-trillion off global GDP.”

“Global stocks ‘a sea of red’ as oil price surges.”

“Unprecedented territory.”

The headlines have been full of scary news, not only about what is happening to Ukrainians but what the Russian invasion could mean for the world economy and investment markets.

The conflict has exacerbated the volatility – ups and downs – that had set into markets as the investment industry recently started highlighting a number of investment risks.

Daniel Kemp, global chief investment officer of Morningstar Management Investments, says risks abound – from rising global inflation, to rising interest rates, to lofty prices relative to earnings (valuations).

As an investor, it is easy to be unnerved and you may even be tempted to pull your investments out of the markets.

Kemp says there is overwhelming evidence that people act in downturns, often withdrawing from investments, mostly to their detriment.

Rather assess the risks relative to your goals and the time in which you have to reach those goals, Kemp advises.

If there is anything – including market downturns ­– that will interfere with your goals, address it, he says.

But if you have time on your side, you are investing for the long term.

Focusing on long-term investing and your goals can be a useful antidote to the bad behaviour many investors succumb to when markets are volatile, he says.

Learn to ride out volatility and avoid giving in to pessimism about risk in the short term, he adds.

If you allow pessimism to drive you into selling during a downturn, you lock in a loss when you might otherwise have stayed the course and seen your fortunes reverse themselves, Kemp says.

Hostile environment

Your investment manager, meanwhile, should be fleet-footed in this hostile environment, he says.

Fund managers addressing the recent virtual Meet the Managers conference hosted by the Collaborative Exchange were well aware of the dangers lurking in the market, but they also see investment opportunities arising as a result of volatility.

Sanctions have had a severe impact on Russian financial markets. The Russian share market halved before trading was suspended, Patrice Rassou, chief investment officer at Ashburton, told the conference.

Most South African’s investors offshore exposure is in developed markets with little exposure to this market. Morningstar, quoted in a Citywire article, shows eight South African unit trusts had more than a 5% exposure to Russia and none had more than 10% at the end of February.

Economically, however, Russia matters because it is the 11th biggest economy in the world, Rassou says. Ukraine at less than a 10th of its size is also an important player in the metals and commodities market, he says.

Russia is a major exporter of energy and metals:

  • 40% of the world palladium and 15% of its titanium and 9% of its copper.
  • 12% of the crude oil;
  • 17% of the world’s wheat; and
  • 18% of the world’s gas and 40% of the gas used in Europe.

As a result there has been massive volatility in commodities markets especially natural gas, where prices spiked by 60 percent and oil, where prices went up more than 30%, Rassou says.

This and other commodity price increases will further fuel inflation.

Oil and gas already scarce

Mark Lacey, head of global resource equities and thematic investing at Schroders, says even before the invasion, the supply of oil and gas was already short as there had been significant underinvestment in these resources.

Oil consumers’ decisions not to buy from Russia will obviously cause a spike in oil prices, he says.

Lacey believes these high prices could slow demand and the cost burden on the consumer could result in a recession. There may be some relief if oil reserves are released, he says

The events in Ukraine will speed up the transition to cheap and sustainable wind and solar power and this is an investment opportunity, Lacey says.

US economy is hot

Iain Power, chief investment officer at Truffle, says the US economy is running hot and fuelling inflation which is likely to stay higher for longer.

Investors have not taken this into account and it is not reflected in the prices on financial markets, he says. There is a lot of complacency.

Truffle says growth shares have massively outperformed more defensive ones but if interest rates rise, there could be a reversal of the trend.

He says investors should be steering clear of fixed income assets with long terms to maturity and expensive tech stocks.

Instead investors should favour cyclical value-type stocks, like banks, energy, auto and insurance shares, which are much cheaper and are able to give greater protection, he says.

Real estate, utilities, goods, beverage, consumer, healthcare do worse in times of rising interest rates, Power says.

William Fraser, director and portfolio manager at Foord, says the most likely outcome of the way the Federal Reserve deals with rising inflation is that it will aggressively hike interest rates and US equity prices will fall –the S&P500 by potentially as much as 20%.

James Turp, head of the Fixed Income Franchise at Absa Asset Management, says managers can reduce your exposure to investment risk a little bit, but you should remember what we learnt from how markets reacted to the advent of the Covid 19 pandemic in 2020.

“You'll remember equities at a point halving in value in some cases and within weeks thereafter, once the extent of the crisis was more understood, markets rebounded again.”

“Try not to overreact,” he says.

Good news for SA

Rassou says the good news for South African investors is that the country has become a relatively safe haven with resources counters benefiting.

Stock picking, however, remains key. While local commodity exporters are likely to benefit, companies with operations in Russia such as Barlow World and Mondi have been punished, he says.

Managers need to be quite judicious in selecting shares, and a thorough investment process that identifies companies with solid business models is the best way to navigate the volatility, Rassou says.

Downturns happen often

Kemp says downturns occur repeatedly. The S&P 500, a leading index for the US market, has fallen by 10% or more 54 times since 1980 alone, he says.

During periods of perceived risk, you need to know your investments enjoy some protection from a downturn in markets, he says.

Kemp says one of the best ways to control risk is to buy strong investments with attractive valuations.

It is equally important to have different risk and return drivers that can weather unpredictable storms, he says.