Investment Update — March 2022

The invasion of Ukraine has led to a global backlash against Russia. The US, Europe and other allies have announced unprecedented sanctions, in addition to providing military aid for Ukraine. With Russia focussed on regime change in Kyiv, the conflict is unlikely to spread beyond Ukraine’s borders, and the risk of a Russian attack on a NATO member is extraordinarily low given that NATO members share a mutual defence treaty. Spillover incidents may occur but the US and Russia have 73 years of experience of avoiding direct war.
Sanctions on Russia have been severe, including the expulsion of some Russian banks from the SWIFT messaging system and a freeze on the central banks foreign currency reserves. The US Treasury went a step further and banned all transactions with the Central Bank of the Russian Federation. Despite the Russian central bank raising interest rates from 9.5% to 20%, the Russian rouble has fallen sharply and the damage to Russia’s economy in the coming months will be significant.

The US and Europe have so far avoided sanctioning Russia’s energy sector as supply disruption would be particularly painful for Europe, with around a quarter of oil imports and 40% of natural gas imports coming from Russia. Given Russia’s influence on global commodity production, escalating tensions have led to a sharp rise in energy prices, metals and agricultural commodities. Fortunately, energy flows into Europe remain unaffected by recent events. It’s an uneasy situation but Russia needs money, and Europe needs gas.

Global equity markets initially sold off sharply, but volatility has subsided in recent days. The near-term outlook for equity markets has clearly deteriorated, but the Russian economy is rather insignificant in the context of the global economy. The three largest economies in the world (US, China and Japan) are largely insulated from the conflict, so we don’t expect the situation to derail global growth, even with energy prices at current levels.

Although financial markets will remain volatile as events in Ukraine unfold, the lesson from previous major conflicts is that the impact on asset prices will be short-lived. Central banks are likely to proceed more cautiously in the coming months, in response to weaker consumer and business confidence, and we have already seen interest rate expectations moderate in recent days.

If you have any questions or concerns, please don’t hesitate to contact us.

Written by:
Charlie Lloyd
Head of Investment, Skerritts

Please note: These are our views, as always, and don’t constitute advice in any way. The value of investments can fall as well as rise and past performance is not a guide to the future. The content of this publication is for information only. It does not represent personal advice or a personal recommendation, and should not be interpreted as such. Please do not act upon any part of it without first having consulted an Independent Financial Adviser.