This month, I am not going to provide my ‘normal’ market review due to the extraordinary events happening in Ukraine. Firstly, and most importantly, my thoughts are with all those suffering in the current conflict.
From an investment perspective, it seemed that we were just starting to see the end of a two-year pandemic, the last thing that was needed was another global crisis. When events like this happen, as was seen with the outbreak of the pandemic, the markets react negatively. Markets simply do not like surprises and, although some may say this wasn’t a surprise, few had expected a full-scale invasion by Russia.
History shows that this type of event only has a short-term effect on markets with short-term volatility swiftly reverting to longer-term performance we all want to see on our investments. However, even before the invasion of Ukraine, markets had been very choppy at the beginning of the year, as I mentioned in my last market review. Some of this volatility was due to the tensions between Ukraine & Russia but a large part was due to inflationary pressures seen around the world.
It had been hoped that these inflationary pressures would ease as the year passed. However, if war is a prolonged state of affairs it seems inevitable that we will see energy inflation keep prices high for the foreseeable future. Already, oil price has increased dramatically. Russia is the second-largest oil producer in the world behind Saudi Arabia and there is considerable global reliance on this commodity as well as their gas. There are discussions ongoing in the West to ban the import of Russian oil and this will almost inevitably affect fuel prices. Shell have been heavily criticised for its decision to buy oil from Russia to keep their reserves up.
As we are already well aware, the cost of gas had been rising dramatically and this will be set to continue. It is being predicted the annual average UK household energy bills could now reach £3,000.
Before the war outbreak, the markets had priced in a Bank of England interest rate rise to 2% by the end of the year. Likewise in the US, it was widely expected that the Federal Reserve would start to increase their rates throughout 2022. All the indicators are that rates will rise, and long term I do not see this position changing. However, it may well be that the central banks delay rises in the short term to see how the war effects the global economy. They will be reticent to raise interest rates only to cut them again if conditions haven’t improved.
Clearly, the volatility in markets will be causing anxiety to investors. As you know, our mantra is always to look for long-term growth over short-term movements in and out of markets. With this in mind, we still believe the best antidote to short-term volatility is by deploying diversified portfolios and having a resolute focus on long-term outcomes.
Last year was a great one for equity markets, as they continued the rebound from 2020 and the effects of the pandemic. I would sincerely hope that, once markets settle down, we will see a return to long-term growth on our clients' investment portfolios.
As always, and especially at this time, if you have any queries or concerns on your investment portfolio, please do not hesitate to contact us.
Who should you contact for more information?
Director Richard Brazier
Financial Adviser Amanda Beacon
Senior Consultant Graham Smithson