John Townsend’s Investment Opinions February 2022

There are decades when nothing happens and then there are weeks when decades happen. – Vladimir Lenin

The Russian invasion of Ukraine is a human tragedy ordered by an elderly autocrat with no popular support and will result in a great deal of innocent suffering. It is at present unclear how it will evolve, but it is likely to lead to the internal destruction of modern Russia. The events in Ukraine have changed the world, probably irrevocably, but we have seen crises before, and they have been met and mastered. It is important not to lose one’s nerve.

This paper does not set out to minimize the disaster, but rather to recognize the effect that this action will have on my clients’ investments. Clearly however, now is not a time for politicians especially, to be over friendly towards Russia and some political parties, in Europe especially, will lose their popularity. As it is, past pro-Russian politicians are issuing a deafening silence or are running from their erst-while ally.

The investment markets are unemotional when it comes to wars and human suffering. Past experience has shown that the aggression that we have seen since 24th February, as long as it occurs away from the global economic and financial centres, is not necessarily considered a disaster.

The traditional emotional response to international aggression is to react with fear and then sell one’s investments. Indeed, there is an international index known as the VIX, which tracks the expectation of volatility expected by traders in the US S&P index over the forthcoming 30 days. However, this would not necessarily be wise, despite the wish to show solidarity with the people of Ukraine and will hurt only the investors themselves.

And yet… tensions between Russia and Ukraine have heightened over the past weeks and the VIX index has risen sharply. Using the reverse of an old adage, the investment markets have been selling on the rumour and can now be expected to buy on the fact. On Thursday 24th February, the VIX closed at 30, well above its average since 1990 of 19. This is a sharply higher than the level 17 at the start of 2022. As the war progresses and casualties mount, the increasing sanctions against Russia could cause even this level could be exceeded.

The global investment manager Schroders points out that rather than being a time to sell, historically, periods of heightened fear have investors have in the past earned the best returns. To quote Schroders “On average, the S&P 500 has generated an average 12-month return of over 15% if the VIX was between 28.7 and 33.5, and more than 26% if it breached 33.5.”

Europe, which was just beginning to regain its economic composure after the Omicron/Covid pandemic is likely to suffer some weakness and a delay in its recovery in the next 2-3 months. However, once the situation becomes clearer economic growth will resume.

The uncertainty will bring with it a downturn in corporate growth. It is likely that Russia will drive energy costs much higher at least for a while. The big oil companies will drive the price of fuel at the pumps higher without much encouragement. Globally the economic impact will less hard-felt, though the belief in a short period of inflation before a return to normality is now likely to scotched.

The USA is likely to be less effected by events in the Ukraine. Especially as US growth has begun to rebound strongly. Much the same is true for China and the emerging markets, though slower economic growth in the developed world will affect these areas too. The US Federal Reserve, which had signaled aggressive interest rate rises in 2022/3 will probably wish to be more careful. Europe, being closer to the centre of the crisis is unlikely, after all, to want to raise interest rates for the foreseeable future. This will support companies and encourage investment even if it does also encourage continued inflation.

Assuming no warfare creep outside Ukraine, after a period of reflection, perhaps three or four months, the investment markets are likely to return to their pre-crisis trends and activities.  Post-Covid growth in Europe will probably resume; such growth has been held back for too long and is bursting to get out, so growth here could be quite strong.

The attack on Ukraine is likely to leave Russia itself badly scarred. Economic sanctions, as long as these are adhered to by all players in Europe, Asia and the US will prove expensive for the Russian people and could cause dissent there. It is worth remembering that the decision to attack was not a popular one, the Russian people were not consulted and have only to pay the price in terms of dead soldiers and economic shortages.

In the long term, again barring a military spillover from the present warfare there is unlikely to be an impact on European economies. Russian teams have become expert at Cyber-attacks on the West, whether companies or governments. It would be a surprise if these were not increased in the near future. The clear message will be the need to diversify away from a dependence on anything Russian, especially energy. This will further encourage the growth of renewable energy as well as nuclear power stations. US natural gas, delivered by sea will probably become interesting again especially as the Russians can so readily affect oil and gas prices.

It is possible that Russia will take over the Ukraine and the Russian Kleptocrats against whom personal international sanctions have already been announced, could take over the resources of the Ukrainian raw materials. This would be a major blow to those who sought to westernize the country. The cost to economic growth in Ukraine and possibly Europe will be immense.

Past performance is not a guide to and cannot guarantee future profitability. The value of investments and the income they generate may go down as well as up and investors may not get back the amounts they originally invested. All investments involve risks including the risk of possible loss of principal.

John Townsend advises the clients of Matz-Townsend Finanzplanung with their investment portfolios. He is a fellow of the Chartered Institute for Securities and Investment in London. (