Wealth Logic market update

Ukraine and the impact on markets

 

The last month has been a wild ride for markets, impacted by the Russian invasion of Ukraine. This followed concerns over rising inflation, and as a result investors such as our clients have seen quite large falls in the value of their investments.

This update attempts to put these events into some sort of perspective.

Firstly, the concerns regarding rising inflation have been with us for a little while as supply chain shocks from the pandemic caused unprecedented pressures. This resulted in rising costs, but our view remains that much of these increased costs will be temporary, and as economies open back up after the pandemic supply will be gradually restored.

The long-term bond rate, which indicates the expected long-term interest rates we are likely to see, has increased a little but is still within the Reserve Bank’s target range of 2 to 3% at 2.7% here in Australia and below 2.4% in the US. Therefore interest rates will rise, but not as high as many have feared.

Also, we should remember that generally, interest rate increases are a positive indication of the health of the economy, so in the long run, are not an impediment to healthy sharemarkets.

As for the impact of the invasion of Ukraine, this has had a significant impact on oil and gas prices, as well as many other goods and commodities such as wheat, of which Ukraine is a large producer. This is likely to feed through to rising inflation in the US and here in Australia, we will see higher rates.

However, again we do not expect the impacts to be long-term as alternative producers will emerge in many cases. Clients should keep in mind that past wars and significant geopolitical events such as the Cuban missile crisis in 1962, the Iraq invasion of Kuwait in 1990, and the subsequent Iraq war in 2003 were initially negative for markets. However, in all these cases, and most similar crises, markets had rebounded within 6 months and continued to on reach new highs.

This is why our advice in these situations is always the same, stay invested. These events are almost impossible to predict in a timely fashion, but what is abundantly clear is that if investors sell out after it occurs they will be selling at a low point.

Those that can see through the current turmoil, are highly likely to be pleasantly rewarded. An excellent recent example is the Covid crash of early 2020. Those that stayed the course saw their investments hit new highs in 2021 and early 2022.

The moral is not to panic and stay the course!

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