When I wrote an article last week entitled the Certainty of Uncertainty, little did I expect that one week later Europe would be plunged into turmoil with the Russian invasion of Ukraine. The message in that article was spot on in terms of dealing with uncertainty – the only thing that has changed is the cause of the uncertainty. I guess that was the point.
The invasion of Ukraine by Russia is both devastating and an important reminder that geopolitical risk is part of investing in global markets. Events like these – military or economic conflicts – can affect stock markets in many ways. These events are generally widely followed by the media and investors, and they are deeply concerning.
There are always two dimensions to an investors’ response to these events, the first is emotional and the second is financial.
The emotional aspect is always the same. We all interpret events differently, and over the next few days, there will be distressing images coming from Kyiv of those killed, maimed, and displaced by the Russian’s actions. Financial markets have already responded with increased volatility – an immediate sell-off, followed by a rally. This pattern will likely continue over the next few weeks, perhaps months. Volatility heightens investors’ fear of loss, driven by uncertainty, and some investors form an expectation that things could get much worse – and they may, but then they may not. Many investors are motivated to act in these circumstances – usually to seek safety.
Our overwhelming experience is that looking through this turbulence is the only way to protect the long-term value of your portfolio and acting on our emotions generally leads to financial losses.
The financial aspect is far more clinical. Volatility is the price we pay for the higher expected return we have of risk assets like shares. Over many, many years of dealing with economic and geopolitical crises like this, we see a familiar pattern where market traders react to the changing news and prices adjust downwards in line with the uncertainty. As time passes, and new information comes to hand, markets adjust their expectations and ultimately, prices stabilise. We believe this is true of all crises, like natural disasters, social unrest, even pandemics.
We believe current market prices quickly incorporate expectations about the effects of these events on economies and companies. Our investment approach centres on using the information in current market prices rather than trying to outguess them. Where markets remain open and continue to function normally, all our client portfolios continue to be invested in line with the usual process. This is done with relentless consistency. We believe that the most effective way to mitigate the risk of unexpected events is through broad diversification and a flexible investment process.
It is possible that this crisis will result in restrictions on trading in Russian markets and that sanctions may affect the small number of Russian companies held in some client portfolios. Our client exposure to Russia is so small that this should not raise any concerns. Many clients will have no exposure at all.
Investors in global equity portfolios inevitably face periods of geopolitical tensions. Sometimes these events lead to restrictions, sanctions, and other types of market disruptions. We cannot predict when these events will occur or exactly what form they will take. Nor can we predict how this crisis will play out.
However, we can plan for them in the way we construct and manage your portfolios. In these uncertain times, I would like all our investors to take comfort from our track record of navigating previous events like these – supported by our clear investment philosophy and our disciplined implementation.
I do understand that some clients may feel uneasy about the current state of the world and a conversation with your adviser may be useful.
When I see events like these unfold around the world, I am reminded of the safety and security we enjoy here in Australia.
Founder and CEO.