Log inResponse to President Putin’s announcement on Ukraine from Jilly Mann
Monday evening of the 21st February 2022 saw Vladimir Putin set out his strongest message yet with regard to his despair at the break up of the Soviet Union and his recognition of the rebel-held regions of Donetsk and Luhansk as independent states. President Putin’s statement poured cold water on the hours of negotiations which had been taking place behind the scenes to find a diplomatic solution to the crisis. Importantly, President Putin did not declare outright war on Ukraine, but his move was sufficient to give him the upper hand in what is fast becoming a dangerous game of chess. His references to the broader Soviet Union also inflamed fears that Ukraine would be just the first of the former Soviet states where he would attempt to land grab and reunify the Union.
In light of this development, we have taken steps to rebalance investor portfolios from two perspectives. The first perspective being that the Ukraine crisis looks likely to affect markets for the foreseeable future and so we have taken steps to sell out of areas that ordinarily we would have held onto due to our belief that a strong recovery was on the cards. The second perspective being that in the wake of every crisis, there are often winners, however crass that may sound and so we have increased allocation to assets that we think may rise in these times of geopolitical uncertainty.
We have maintained our UK and US allocations for now. Despite a surprisingly understated opening for stock markets on the morning after Putin’s announcement, as the day wore on reality seemed to take hold and most global markets headed downwards. The FTSE 100, FTSE 350 and FTSE All Share were some of the few markets which ended the day in marginally positive territory. That may not continue unabated, but we do believe that the composition of the UK funds which we own is weighted towards sectors such as energy, financials, healthcare and utilities which could hold up better than other areas at this time. We have switched out of our allocation to UK Smaller Companies in favour of more large company UK exposure, again to bolster our exposure to those sectors which may be less affected in the days and weeks ahead. We would consider this to be a temporary measure as we believe that once the initial furore over Russian activity settles or at least becomes clearer, UK smaller companies will still be a strong growth area for portfolios.
In the US, our allocation is to relatively stable (some may say boring) industrial stocks. The US have started to announce their own sanctions on Russia, as have the UK, but the US exposure we own is aimed more at the domestic US market and so we feel more confident that whilst this will still be affected by global developments, it should be more sheltered from the full affects than a broader US fund with plentiful overseas exposure.
We have sold our Emerging Market Debt allocation to cash. This fund formed part of our weighting to fixed interest, some of the lower risk assets within portfolios, however, we need to be cognisant of global liquidity, especially liquidity in any assets with exposure to Russia or former Soviet states. We thought it prudent to sell down before any semblance of a liquidity issue arose in those markets for example from sanctions on Russian banks or financial markets, should indeed any such issue be forthcoming. We will redeploy this cash at a suitable moment in the coming days and weeks.
The overriding move we have made though is to increase further our allocation to natural resources. We have sold our allocation to Japan, Pacific and European funds in favour of JPM Natural Resources and Blackrock Gold & General.
The Japan and Pacific funds have not performed as well as we would have hoped in recent months. It is fair to say though that without the heightening tension in Ukraine, we would have held onto both funds. I strongly believe that the Japan fund was unfairly caught up in the global tumult and would have readily bounced back given a calmer backdrop, the case for investment remained strong even with the dip it had suffered. With regard to the Pacific fund, this was specifically chosen to give portfolios some targeted exposure to Asia, including China. Chinese authorities are looking to loosen their fiscal policy in an effort to boost Chinese growth numbers, which should be positive for Chinese equities and would in turn have benefitted the wider Pacific region. However, we need to be pragmatic in these times and whilst we remained supportive of both funds, now is the time to increase allocation to resources (commodities such as oil & gas) and so we needed to take the allocation from somewhere. It is never ideal to crystallise losses on funds, but occasionally it happens and we believe that further sanctions will be imposed on Russian oil and gas producers. Germany have just announced the suspension of the Nord Stream 2 gas pipeline development with Russia, with the knock on effect that resources prices are set to rise further. We need to be exposed to the resources sector to capture any upside that may ensue.
Regarding gold, this may not experience the same rate of inflation as oil and gas is experiencing at the moment, however, in times of uncertainty, we feel it wise to own gold exposure. There is the basic need to continue mining which will always impact the price of gold, but equally the nature of gold as a safe haven can add a premium to the price. We consider the gold exposure to be a safety feature within the portfolios, which hopefully also delivers a positive return.
Finally, our switch out of European equities is another decision based on pragmatism rather than particular concern over the potential growth in either of our preferred European funds or the region. Europe faces the most challenges with an aggressive Russia on the doorstep and may be more reticent than either the UK or US when it comes to imposing wider spread sanctions. When composing portfolios, we always ask ourselves, is the suggested holding worth the downside risk associated with it as much as the potential upside return. Based purely on investment fundamentals, Europe has plenty of potential upside return, but the downside risk outweighs that return with the Russian situation as it presently is. Put simply, we think there are better places to allocate to with potentially similar upside, but with more opportunity to protect any downside risk.
We hope these changes to be temporary and we will remain active in manoeuvring the portfolios as developments happen. The same message applies in the sense that despite our best efforts, not everything will go up at the same time, all of the time and we must be prepared to be patient, however, we feel now is also the time to not be precious about our allocation and to have the conviction to deploy assets where we believe we can both protect and hopefully benefit the portfolios from the fallout of the Russian crisis, however long it may last.
We continue to monitor more ordinary economic news and it will be interesting to see how Central Banks, both the Bank of England and the Federal Reserve in the US, respond should the Russian crisis continue and energy price inflation march upwards. We are all experiencing already rising energy prices in the UK and so additional inflation on top of those elevated prices really will start to put pressure on Central Banks to ease off from further tightening measures such as increased tax or interest rates. There is much to consider in the coming weeks, but please be assured that we are reacting to events as they happen and remain poised to further protect the portfolios should the conflict intensify.