A View From The Top End - Special

Russia - Ukraine Conflict

With the continued illegal invasion of Ukraine unfolding before our eyes it illustrates the effect geo-political events can have on markets – in the short term – when they occur.

The conflict itself was foretold by both US and UK intelligence services as Russian rhetoric trumpeted that recent troop movements were tied to military exercises in the area. Almost on cue Mr. Putin followed the script from the 2014 annexation of Crimea and crossed Ukraine’s borders with malice last week.

Putting aside the human tragedy that the Ukrainian people are experiencing due to the Russian insurrection onto their lands and commenting purely on market implications we see effects of the conflict as mixed.

Western Response

One of the possible miscalculations of the Russian leadership, was the financial response from the West. In a show of solidarity Western democracies have banded together and isolated Russia from capital markets like nothing in the past by freezing assets of the Russian central bank and removing Russia from the SWIFT payment system. Neutral Switzerland broke a 207-year neutrality streak by siding with the EU and seizing Russian assets. None of these actions have a direct effect on any of our holdings as we do not own Russian assets, or do we have exposure to the Ruble.

You can expect to see the cost of the war at the fuel bowser with sanctions effecting Russia’s oil field technology access as well as making traders that help export Ural crude worldwide rethink the legality of their relationships. Other key Russian exports in aluminium, palladium, nickel, and wheat are expected to climb in price, pushing inflation.

Inflation was already a core focus for our portfolios, and we are positioned with holdings in equities, materials, real estate, and infrastructure as hedges. Our positions were a touch early in implementation but have offset losses in other sectors from the conflict.

We hold increased levels of cash as Central Banks are likely to continue raising interest rates. Initially rate rises will compress asset valuations but continued earnings strength will signal an improving economy outside of the current geopolitical environment.

What Happened in the Past?

Using history as our guide the overall market affects of geopolitical events jolt markets, but do not derail them. Looking at Vietnam (1964), the Gulf War (1991), Afghanistan (2001), Iraq (2003), and the Crimea War (2014) the lead up is where markets fall. Once the shooting starts downward market trends have traditionally reversed.

Why does this happen? We have written before that markets dislike uncertainty. It is a story of the old Hollywood horror trop; viewers are more scared of the monster they cannot see, than the one that has revealed themselves. Ridley Scott’s 1979 Alien used this trick on their way to an Academy Award for best visual effects. The famous Xenomorph from the series first appears an hour into the first film and only receives 4mins of screen time, relying on the imagination to do the heavy lifting and give audiences a scare.

Despite the demonstrated history, analysts like movie goers can get caught in the same crystal ball traps of the past and start to believe, “that this time will be different”.

The caveat of looking back on history for guidance is that nothing is ever guaranteed, and the past is not a predictor of the future. However, sticking with your saving and investing strategy and remaining disciplined can pay off, as sharp market moves due to geo-political events are usually fleeting in nature.

Regards,