Comment

By James Klempster

 

We share everyone’s horror at the Russian invasion of Ukraine and the subsequent ongoing war. It goes without saying that we join with everyone in hoping there can be peace as soon as possible.

At times like this, it feels insensitive to discuss investments and the ramifications of these events. But we have a responsibility to our investors to manage our funds and portfolios through this period and to communicate our views and any changes we are making.

We all hoped this year would bring a break from the buffeting we received from Covid. Sadly, Russia’s invasion of Ukraine has eclipsed any notion of a quiet start to 2022. At the present time, the humanitarian impact on the people of Ukraine cannot be overstated and the response from asset classes to short-term and potential longer-term uncertainties is understandable.

Whether it proves rational in the long run is a different matter. Fund managers regularly retort that politics is an unpredictable phenomenon, and geopolitics further still, and, even as Russia had amassed hundreds of thousands of troops and tonnes of armour on the Ukrainian border, most of us expected a peaceful resolution to the hostility.

Where we find ourselves today is in an emotional maelstrom, with horrors unfolding on our television screens and a shorter list of “certainties” to rely on than we had a matter of weeks ago.

READ MORE: Volatility undermines markets as war threatens financial recovery

It is a psychologically precarious state not helped by the sensational manner in which stock market falls are reported in the press, when similar-sized gains go without mention.

To be invested through this period, scarcely two years since we first locked down on 23 March 2020 is, in a literal sense, extraordinary.

In difficult times, investors like to fall back on “similar” periods in our history and there are examples of regional conflicts we can highlight to demonstrate stock market impacts have been relatively modest. Over the past five decades, most conflicts have caused relatively modest sell-offs and recovery periods were measured in days or weeks rather than months.

Clearly, in such a vast, complex and fluid environment, it is difficult to draw too strong a parallel with the past.

What is difficult to envisage (absent a significant further escalation of these tensions outside Ukraine’s borders) is that the conflict is likely to derail the global economy and the prospects for long- term investors in businesses. Investors must ask themselves whether a 10% fall in the FTSE 100, for example, is premised on short-term perceptions of riskiness or fundamental analysis of all cash flows in perpetuity from the global company’s stocks listed here.

READ MORE: Food boss warns Ukraine war could see double-digit inflation

We would argue, respectfully, that it is more likely to be the latter rather than the former. Is it reasonable to assume that a regional conflict, however harrowing, will impact, in perpetuity, the ability of a basket of well-run, global businesses in a way that has not happened in the past? It is possible, of course, but it would fly in the face of precedent.

This brings me to my central point, which is to stick to the plan. We know how incredibly difficult it is to remain confident in the prospects for the global economy and investments on the back of the past couple of years. The latest source of concern could spread into a more systemic source of risk, but the same could have been said of Covid or the global financial crisis.

The one truism through all these events is that markets will tend to turn positive before the news does.

While historical returns promise us nothing, they do demonstrate that stock markets reward patient investors and more often than not, markets go up, even against a prevailing wind of bad news. Looking back over the past 50 years of the global stock market, in 62% of months the market ended up higher than where it began.

James Klempster is deputy head of multi-asset at Liontrust.