As many of you may be aware, the conflict between Russia and Ukraine has escalated to the point of military operations. Although this event has been building for some time, the most recent developments have had a material impact on financial markets and garnered international media attention. We wanted to provide some perspective for clients who may be feeling some emotional discomfort with their investment security.
It is important to remember that market declines are a normal occurrence over time. Regardless of the reason for a decline, it would be very unrealistic to expect that financial markets will continuously and smoothly go higher. It is also important to know that predicting future direction of the markets in the short term is next to impossible – in either direction! What is predictable, however, is that in the long term, markets tend to go up and tampering with your investments due to short-term events is not recommended. Stick with certainty, and do not indulge in uncertainty.
Our expectation is that markets will stay very volatile for the near term – we could experience dramatic swings in both directions as the severity of the conflict changes and the impacts ripple through economies. Justwealth has very minimal exposure in its portfolios to investments directly related to the conflict: zero exposure to Ukraine, a very small indirect exposure to Russia for portfolios that own an emerging markets ETF. Equity markets are correlated, however, so declines will likely be felt across most regions and sectors.
Two benefactors (temporarily at least) are oil and bonds. Russia is a big exporter of energy and economic sanctions may restrict output, forcing prices higher. This will likely benefit the Canadian equity market which has a disproportionately high weight in energy stocks. Bonds, which have suffered lately, typically become in demand during times of crisis as a safe haven investment. Furthermore, the economic uncertainty which arises during times of international conflict, may cause central banks to re-think their planned pace of rate hikes to a slower pace than previously expected.
To summarize, we acknowledge the short-term disruption to financial markets, and ultimately our client assets, but do not see the impacts as anything more than a normal course of market cycles. We do not intend to make any portfolio changes and would suggest the same advice to clients. This event will pass, hopefully with minimal impact to citizens of all nations. We remind all clients that equity market declines have a historical recovery rate of 100%.