Key takeaways:

• Immediate reaction: Investors have rapidly responded to Russia’s invasion, with global stock markets down, oil prices up and a move to safe-haven investments including government bonds, gold and ‘safe’ currencies like the US dollar
• In the short term: We expect some market volatility and, potentially, increased inflationary pressure
  
• In the medium term: History suggests the economic impact is likely to be minimal and the market impact is likely to be short-lived
  
• Our portfolio positioning: We’ve already made adjustments to our clients’ portfolios and funds to prepare them for what was likely to be a more challenging year

We saw an instant market reaction to the increased uncertainty, with stock markets falling between 2 per cent and 4 per cent, and oil prices rapidly rising above $100 a barrel.
 

To provide more insight, we asked Monique Wong from our Asset Management team key questions about the current situation and how it might evolve:

How might the invasion affect the global economy?

Should we be worried?

Russia represents around 3 per cent of the global economy, so is not significant to it. Although this remains a serious but distinct geopolitical development, the economic consequences are not on the same scale as the outbreak of Covid two years ago.

The economic impact is likely to be limited outside of Russia and Ukraine, and mostly concentrated in Europe given it imports nearly 40 per cent of its natural gas and 25 per cent of its oil from Russia.

We still see solid conditions for investing over the long term – the global economy continues to grow, if a little slower than before, companies are reporting solid earnings and the outlook remains positive in our view.

What could happen to the financial markets?

Historically, geopolitical events tend to be a short-lived distraction to the prevailing macro backdrop. The greatest impact has been to the Russian equity market, which is down 23 per cent year to date (as at February 24).

What is the short-term impact likely to be?

The biggest immediate economic impact comes from an increase in inflationary pressure due to a spike in energy prices. Russia is the world’s third-largest producer of oil and second-largest producer of natural gas, so trade disruptions and increased sanctions will have a knock-on effect on prices. Similarly, food prices could rise, with Russia and Ukraine significant global exporters of both wheat and corn. This creates a challenging inflation environment.

However, these commodity price rises are effectively a tax on the consumer and have the effect of moderating economic growth and reducing demand for goods and services. This, in turn, lowers inflation over the longer term. Although it does not change the interest rate direction, it could lead to central banks stepping back from an aggressive push toward higher interest rates, placing less of a burden on their economies.
 

What has happened in similar situations in the past?

Looking at historical precedents, geopolitical crises don't typically have long-term consequences for investors. A study by Deutsche Bank in 2017 found that, on average, a market sell-off following a geo-political event lasts 15 days, with markets recovering to former levels just 16 days after that. This can create buying opportunities for investors.

As a general rule, past performance should not be taken as a guide to future performance. The value of investments, and the income you get from them, can fall as well as rise and you may not get back what you put in.
 

Should I worry about my investments?

While risks have risen and the market will exhibit volatility through this uncertainty, we believe in standing firm and remaining resilient. Investing is about the long term – over time you stand the best chance of making the most of your investment. If investors cut and run now then, following a market recovery, they could well end up paying more to buy back the same positions as well as missing out on any potential upside.
 

What has Coutts done to manage clients' investments?

Prior to today, we made a number of changes to our clients’ portfolios and funds to help them withstand the current landscape. We have been reducing our exposure to European equities as we could see various headwinds coming towards them, and have been buying more US stocks, which tend to do better when investors look to reduce risk.

We also recently bought more government bonds, which tend to do well as investors move to the relative security they can provide. If tensions rise meaningfully, the ballast these bonds provide to portfolios will really kick in.

We have very limited exposure to Russian equities too – just 0.1% in a typical balanced portfolio.

For more information, please contact your private banker.

Past performance should not be taken as a guide to future performance. The value of investments, and the income you get from them, can fall as well as rise and you may not get back what you put in.