Investors must master difficult skill of holding their nerve in times of strife
THE pace of events over the last couple of weeks has been extraordinary and I would dearly love to talk to someone who says they understand exactly how things are going to pan out over the next few months. I am no longer young enough to be certain of anything.
It almost seems trite to talk of the financial implications of the war in Ukraine when so much suffering has been unnecessarily released but it is, nonetheless, important.
Stock markets were already worried about inflation, rising interest rates, weakening consumer sentiment, energy costs and labour shortages before Russian President Vladimir Putin began his Ukrainian adventure. Even prior to the invasion oil and gas prices had appreciated markedly. As I write, Brent crude is trading at $127 a barrel and nobody would be surprised if it goes higher.
At Saracen, as portfolio managers, it is naturally a huge temptation to tinker with the stocks we already hold in these uncertain times. However, it is very likely this would be a mistake.
On the day Russia invaded Ukraine the
FTSE 100 fell almost 4 per cent and many stocks fell much further. However, the following day markets recovered most of that as investors hoped the impact of the war might be contained by sanctions against Russia. That hope has now dissipated, and sentiment was further impacted by Russia’s threat to use its nuclear weapons.
It has been a dismal 2022 for the UK stock market so far, with all major indices falling sharply. The Mid 250 index, in particular, has fallen almost 20% this year and the small cap index is not far behind. This compares to the FTSE 100, which has fallen by “only” a little more than 5%.
There are companies that are performing well through this crisis, and these include defence companies such as Avon Protection and Chemring, as well as more defensive stocks, such as utilities and food retailers. However, the best performing UK stocks since the invasion have been mainly commodity producers and cyber security experts.
At fund manager school in the mid-1980s,
I was taught that any sharp appreciation in the price of gold was a sign of war to come. This has turned out to be nonsense, but there is no doubt that in uncertain times it is hard to beat as a store of value, and the gold price has risen steadily since tensions started to increase in the Balkans.
Ukraine is widely known as the breadbasket of Europe. It is the world’s largest producer of sunflower oil, a major exporter of barley and, along with Russia, provides almost 30% of the world’s wheat. Continued food price inflation feeding through to our supermarkets is guaranteed, all the while piling pressure on the consumer.
The sanctions that have been announced against Russia are likely to play havoc with the supply of industrial metals, most notably palladium (Russia controls about 25% of the global market), which is used in catalytic convertors and in the electronics industry. There are negative implications too for platinum, copper and aluminium markets.
There is an old stock market adage that says, “When in doubt, do nowt.” That is not to say it is easy – in fact it can be downright uncomfortable. There will certainly be bargains out there, but the main difficulty for a portfolio manager or private investor is to decide when the time is right to commit more capital to the market.
I think we can all agree there is plenty of doubt to go round, and the endless talking heads and “experts” incessantly paraded on the TV news bulletins do little to clarify the situation.
But panic is not the answer (unless nuclear missiles start flying around – I then plan to be first in the panic queue). Selling stocks that have yet to rally, despite underlying positive trading news, would not be rational. Neither would using the proceeds to buy shares that are already doing well.
History tells us markets can recover very quickly from exogenous shocks. For example, the bounce back from the pandemic-related lockdowns, as well as the recovery after the terror attacks on America in September
2001, to name but two. Those who held their nerve through the difficult times were able to capture the upside when markets rallied.
I feel we could do worse than keep in mind the words of Volodymyr Zelenskyy, the increasingly impressive President of Ukraine when he said, “This will be a very difficult night. But the morning will come.”
It almost seems trite to talk of the financial implications of the war in Ukraine