Ukraine / Russia
A very brief update on what we are seeing in financial markets and the impact on our portfolios: We have an investment committee on Monday and will provide a more detailed report on developments and their implications by the end of next week.
In general there seems to be a reassessment of future returns and current security pricing rather than permanent long-term damage to businesses (especially in the US) and does not particularly hinder the ability of our fixed income securities to meet their obligations.
Initial Observations (subject to change):
- Government bond yields have, for now, stopped rising. The conflict has likely lowered economic growth expectations and the drops in equity markets in the US will likely stay the hand of the Federal Reserve in terms of the speed of interest rate rises over the rest of the year.
- Having reached bear market territory (a 20% drop) at the open of US markets yesterday, the Nasdaq saw a strong 5% rally much of which appears to be holding firm as I write.
- Oil prices, which had already been rising, rose a bit more, but have not spiked upwards as one might expect. Russia is not the only supplier of oil and gas and demand will likely fall over the longer term as green agendas are pursued.
As is so often the case, civilians in Ukraine look to be suffering the most pain and our hearts go out to them. This feels uncomfortably close to home. Although there are many opinions on what will happen next, Putin has proven that he cannot be second guessed; we will continue to monitor closely.
Although there are absolutely no positives to be taken from the Russo-Ukrainian conflict, we have relatively little direct exposure to Russian assets with Blackrock Emerging Markets representing the majority of our holding, with an 8% position at the end of January. Although there will likely be very many second order effects with western sanctions and their implications still being worked through, we are certainly not over exposed compared to peers.
The Russian equity market will no doubt contain the biggest number of permanent or long-term loss situations. The Russian index fell by more than 50% from mid- February to yesterday due to the threat of sanctions and after a strong run up in the previous few years. It would not be a surprise to see some Russian companies not survive, though the market is up 14% as I write. We estimate that our exposure to Russian shares was around 1% in our pure equity portfolios and less than 0.5% in our mixed asset portfolios in early February and we are following up with the relevant fund managers to get their thoughts and understand the actions, if any, that have been taken.