Ukraine & Russia


The war in Ukraine is causing terrible human suffering the like of which we all hoped never to witness and for which we hold the deepest sympathies. This is a fast-moving crisis with enormous uncertainties, to the point something is likely to have changed before I have finished writing this piece, but we have a responsibility to monitor the economic and market implications of the crisis and manage such positions for our clients. 

 The conflict in the Ukraine is the central cause of these most recent market falls, with the global economy recovering from the pandemic, and growing inflationary concerns, now exacerbated by the war’s impact on global oil and commodity prices and the negative impact this will have on global economic growth. 

 The immediate impact of Russia’s hostile actions and subsequent sanctions by the West has already been seen, equities have fallen sharply and many regions, in particular Europe, have seen equities hitting new lows for the year. In the US the Dow Jones officially moved into correction territory, falling by more than 10% from its peak in January, while the Nasdaq, that holds US technology stocks has moved into bear territory falling by more than 20% from its peak in January. In the UK, the FTSE All-Share Index is down 8% from its peak in January. As a result of sanctions already imposed by the West, Russian assets have plummeted also.  

 The conflict could take a variety of forms and unfortunately is not likely to be resolved soon. Over time, it will become more difficult to get information about what’s happening in Ukraine, which will only add to uncertainty and nervousness, and therefore is likely to result in further market volatility. 

 As covered in my recent article, “Uncertainty abounds – it always does”, Russia represents between 0.13% and 0.36% of global equity markets exposure within our portfolios. Where a portfolio has exposure to Ukraine, this is at a maximum of 0.01% of the equity exposure. This was not a tactical decision, and our portfolios still maintain a close to market-cap approach, with small differences due to the tilts adopted within our portfolios. 

 As Russia is the world’s second largest producer of crude oil and supplies the EU with about 40% of its natural gas and 25% of its oil imports, the conflict continues to pose risks beyond the two countries’ borders, including higher energy prices. 

 Europe, via its geography and energy dependence is much more exposed than the US and the rest of the world to the effects of the crisis. Oil is readily transported but gas not so. Europe receives its gas from Russia via a pipeline that runs through Ukraine and does not have enough terminals to handle alternative supplies. There are continuing calls for Western countries to ban Russian oil, with the UK announcing a phased ban of Russian oil, but not gas. As seen with the reaction to news of Shell buying discounted Russian crude oil, it is suggested that public views would be to side with a ban on Russian oil. 

 Any bans could see Russia retaliate by closing its main gas pipeline to Germany. Should this happen, it would not be very easy to source substitute gas. According to calculations by the Institute of Energy Economics at the University of Cologne, current levels of gas held in European reserves “could compensate for a loss of Russian deliveries” over the next six weeks unless temperatures were to drop dramatically. This potentially increases the impact of Russia’s potential response to oil bans. 

 Russia may be able to find new outlets for its gas export, notably China, which would limit the impact on global supply shortages. 

 The impact of these bans and closures would be seen in price increases in the global market as demand for energy supplies in Europe increases. We are likely to see heating prices, which are already high, increase further, whilst petrol and diesel prices are increasing. This would all combine to increase upward pressure on inflation, which could potentially increase further uncertainty. Higher oil and gas prices could benefit companies in other countries, for example the US, as there could be an increased demand for substitute gas, for example liquefied natural gas, from Europe. 

 As with all market shocks, it’s human nature to attempt to take some form of action, but to do so you can run the risk of attempting to “time the market”. Picking winners and losers is a dangerous game. To avoid this, one of the benefits offered by our portfolios is diversification.  

 Diversification will naturally minimise the risk of loss, if one country performs poorly over a certain period, other countries may perform better over the same given period, reducing the potential losses of the portfolio compared to if it had been concentrated in one market. 

 Even in these difficult times, predictions are exactly that, just predications. If you would have asked anyone what the economic environment would have looked like today 3 years ago, it’s almost certain that none of them would have been remotely close to predicting the current position. Therefore, whilst we are not certain about the future, we invest on the core principles of an evidence based strategic hold investment strategy, with diversification across the globe and tilts to assets that will deliver long term outperformance is the preferred long-term course of action for superior risk-adjusted returns.  

 The argument that these tilts have certain moments in the economic cycle where they shine is true. However, moving in and out of these positions at optimum times and consistently predicting when are entering a certain stage of the economic cycle is near on impossible to do. We, therefore, believe that including tilts in our portfolios at all times has positioned them well to deal with any market regime, and only stepping back and taking a holistic portfolio view over a long-term investment horizon can we fully appreciate the interaction among these tilts. 

 While there will be commentators suggesting that holdings should be sold into cash, and to re-enter the market when the worst is over, this is a very dangerous strategy, because as referenced above, calling the bottom of the market is near impossible, and missing out on the market recovery will be very expensive. Yes, there will be some investors that will do this, and yes, we will certainly hear about it, but just to repeat this is very dangerous. The markets are very volatile and emotive currently, any good news regarding the conflict will result in stock recovery, and we wish to be invested when this occurs.  

 So, while markets may not have reached the bottom, our position is very much hold, and, if your position warrants this, to dip into the markets either with new cash, or through an opportunity rebalance, where within your current portfolio you sell defensive bonds to buy the growth equities.  

 We do not know how or when this conflict will end, nor the short- and long-term implications this will have on global economies and stock markets. Much will depend on how Russia behaves in Ukraine, and we offer no forecasts on that. The damage inflicted on the Russian economy from sanctions already imposed, both by governments and businesses, has been considerable. However, the potential upward pressure on inflation could benefit the Value tilts adopted within our portfolios. 

 Of course, you should speak with your planner here at Henwood Court that knows and understands your position about your personal position. 

 As ever, we are here for you if you wish to discuss any matter raised within this article. 

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A warm welcome to Stephen


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