Top Topics is a timely email for Acadia Clients only. We are providing information and guidance on current issues of great importance to you.
'Glory to Ukraine' graffiti, Vladimir Lenin Statue, Novosibirsk, 2015
Conflict = Uncertainty = Volatility
The unprovoked Russian invasion of democratic Ukraine has sent various markets into significant turmoil. This is normal and expected, but uncomfortable. As with all geopolitical events, wise investors maintain perspective and stay focused on their goals.
Topic: Russian-Ukranian Conflict
We are still just days into the Russian invasion of Ukraine. It seems obvious to say we have no idea how long this will last or what potential outcomes look like, but here are some of the ways we are thinking about it:
Thoughts from an Economic Perspective
Keep in mind that Russia is considered an emerging market and comprises just 2.9% of the FTSE Emerging Markets Index (the index used for Vanguard FTSE EM, ticker=VWO). Using a sample target of 15% for emerging markets in the equity portfolio, a client’s direct exposure to Russian equities is likely less than 0.5% of their total portfolio.
The US and other countries are placing increasingly severe sanctions on Russia. These sanctions will likely take some time to have major impact, and the repercussions are unknowable at this time.
Global economies have already been dealing with high inflation coming out of the Covid-19 slowdown. With food and energy prices impacting CPI (Consumer Price Index), it will be interesting to see how CPI changes in the following months. Similarly, central banks across the globe have been arriving at different decisions about if/when to increase interest rates. Prior to this week’s events it was widely expected the Federal Reserve would raise interest rates in the US during their next meeting. We do not know yet if/how these recent events will impact the decisions that our and other central banks will make.
Reminder: timing the market does not work. Markets do not like uncertainty, so expect more volatility as the events continue to unfold.
Client portfolios have been constructed with a variety of assets. Diversification is important—including high quality bonds, which should serve to reduce volatility.
While geopolitics may impact market returns in the short term, economics drive markets over the long term.
We would suggest not making any material changes to your portfolios based on these circumstances.
What Does History Teach Us?
The investment company Vanguard Group produced the graphic below which demonstrates how previous geopolitical events have historically been short-lived from a markets perspective.
Fearless Girl
Although the Fearless Girl statue was erected for other reasons, it provides a wonderful visual of how investors should approach market volatility: Stand firm. You can learn more about the statue HERE.
