Keep Calm and Carry On (Once Again)

It feels unequivocally unfair and tragic that in the same week we began to move on from the global pandemic that had marked the course of our lives for the past two years, we’ve walked headfirst into the makings of a world war. We would be hard pressed to say that when in January we wrote “Stepping into 2022 after two incredibly tumultuous years, there’s a sense of wonder – are the big risks that we’re already aware of, the events that will mark the course of this year or is it going to be something else that we’re at present oblivious of” we expected something of this magnitude.

Even before this week, 2022 had already indicated it may be a slippery slope for stock and bond markets as fears of higher and more sustained inflation had grappled investors. But a geopolitical crisis with Russia in the epicentre as a key exporter of energy and natural resources, is a sure way to only add proverbial fuel to these fears. Both stock and bond markets met these events with volatility as it’s ultimately expectations that drive their directions of travel, and this turn of events certainly caught the majority by surprise.

And while the unknown raises concern about the consequences of this conflict, from an investment point of view here are a handful of knowns to hopefully bring some comfort:

  1. Short-term volatility around geopolitical events may not have long-term damaging effects to investments

We saw this most recently in the Spring of 2020 – what seemed like an insurmountable blow for businesses and households globally, actually resulted in a relatively short-term stock market consequences. The S&P 500 (the main US stockmarket index) took 6 months to recover fully to its pre-pandemic high.

  1. Sadly, war has historically had positive effects on capital markets

capital-market-performance

The human cost of war is always heart-breaking, but sadly under the harsh lens of history wars and conflicts have resulted in overall positive capital market performance, typically after an initial period of uncertainty and stock market volatility in the lead up. The Swiss Finance Institute has examined this in detail as a phenomenon called “the War Puzzle”, where they ultimately attribute the surprise factor in the lead up to war as a main reason for initial decrease in stock markets.

  1. Volatility does not mean investment loss

It is natural to think that if the value of your investments has gone down, you’ve suffered a loss. In reality, however, this is not the case – a loss is only crystallised if this investment is sold at this point. If the investment is left alone this gives it a chance to recover back to previous levels and exceed them in the future – which is something that cashing out does not. And if you are currently taking or plan to take withdrawals from your investments, we have a system in place for realising only assets with no or lowest losses.

  1. Diversification shields your portfolios

While further development of this conflict may affect many countries and regions, your portfolios are well diversified both globally and across asset class – at times of extreme distress assets can begin to correlate more closely and fall simultaneously, but when the initial shock is processed normal correlations return. Moreover, through holding broad based index funds rather than individual stocks or more narrowly-focused active funds, you are exposed to a wide variety of companies – while some may suffer from the increasing cost of energy, inflation of materials or any subsequent effects, others may be able to weather the storm well.

  1. Financial crashes and recessions are a known unknown

financial-crashes-recessions

When we invest, it helps to be mentally prepared that financial crashes, corrections, recessions and black swan events are certain – the main uncertain things about them are their timing and origin. They are the price to be paid for the positive returns at other times, and the overall long-term growth – there’s a significant amount of evidence to show that investors who try to avoid these downturns tend to miss on the upside as well. And if we step back to look at the longer-term, we can see that historically markets tend to find a way to overcome the challenges, recover and continue to grow. The reasons for this may be partly psychological – many of today’s investors have seen markets recover from several black swan events (Dot Com bust, Global financial crisis, Pandemic crash) increasing confidence levels. So while the world has set eyes on the people of Ukraine and we all wait to see which direction the world leaders will take in this evolving conflict, we hope that you can, once again, keep calm and carry on.

Radostina Dencheva Chartered FCSI, Investment Analyst

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