After the turbulent markets of early 2020 when Covid sent the Globe into unchartered territory, I’m sure we all breathed a sigh of relief as the dust started to settle and thankfully a shortage of masks and hospital beds seemed to be behind us. We saw some fantastic growth in the markets as the world returned to a ‘new normal’ and international travel became easier, allowing us all to see our loved ones far away once again.
Then along came 2022 … to understand the turbulent markets we need to look at what’s going on in the world and the impact it has on economies …
In February 2022, Putin claimed that Ukrainians and Russians are one people. He sees Ukrainians and Russians as brother nations and says that because Russia is the older brother, it should get to be in charge.
Most Ukrainians disagree. They have been inspired by the words of their president, Volodymyr Zelenskyy. He told Putin that Ukrainians want peace, but that if they need to, they will defend their country’s independence.
In Russia, the people had no say about whether to invade Ukraine. Many are protesting against it. Many families have both Russian and Ukrainians members. Because of this, a lot of people on both sides of the border do not want to fight a war against each other.
The United States and much of Europe believe Ukraine should be able to decide its own future. The war has also prompted more than three million people to flee Ukraine as Putin continues his attempts to topple the democratically elected Ukraine government. The United States and the European Union have imposed some of the toughest economic sanctions ever on Mr Putin’s government. Hundreds of Western businesses — manufacturers, oil companies, retailers and big brands like McDonald’s, Nike, Coca-Cola, IKEA and Apple are among over 1,000 global firms that have exited Russia or made public plans to scale back their activities there —turning back the clock on the country’s opening to the west. At age 69 and probably in the twilight of his political career, after spending his 22 years in power rebuilding Russia’s military and reasserting its geopolitical clout, Mr Putin appears intent on winding back the clock more than 30 years, establishing a broad, Russian-dominated security zone resembling the power Moscow wielded in Soviet days.
At stake for Europe is the security structure that has helped keep the peace on the continent since World War II. Europe has important trade ties with Russia, and stands to lose far more than the United States from sanctions. The foreign assets of wealthy individuals and businesses allied with the Kremlin have been frozen. Olaf Scholz, Chancellor of Germany, has tried to take on a leadership role in the crisis, halting certification of the Nord Stream 2 natural gas pipeline that would link his country with Russia — one of the strongest moves yet by the West to punish the Kremlin.
It has thrown global financial markets into severe turmoil. The surge in energy and food prices, in combination with post-pandemic supply chain strains, have driven inflation rates around the world to levels last seen in the 1970s. Borrowing costs have ballooned and default worries deepened. The euro is down more than over any comparable period in the years since its introduction in 1999, reflecting the view that further cuts in supplies of Russian gas will hit particularly hard major euro zone economies that depend on it, such as Germany and Italy. Russian gas flows through major pipelines to Europe have fallen around 75% since the start of the year leading to accusations by top European politicians that Moscow is weaponising its natural resources.
Russia has denied the cuts are premeditated, but the fact they are happening and that the EU relied on Russia for 40% of its gas before the invasion, has resulted in European gas prices to increase dramatically and they are expected to remain high for years to come.
Germany's and Italy's reliance on Russia has made their stock markets among the world's worst performers. Those close to the fighting, including Poland and Hungary, have also seen their equities and currencies tumble. Shares of European chemical companies have suffered some of the biggest declines since the invasion, because natural gas plays a key role in their manufacturing process. Car parts makers have also been hit hard, partly because Russia was a major market for firms such as VW and Mercedes and partly because Ukraine and Russia have also been suppliers.
Ukraine has defaulted as the war has wrecked its economy and finances. Sanctions have also pushed Russia into its first sovereign debt default in decades and left over $25 billion of the country's corporate debt unpaid.
Then, just as we think 2022 can’t get any worse, enter (and exit) Liz Truss, lasting just 45 days in office after a disastrous mini-budget created chaos in currency and bond markets. Forced to backtrack on much of the policy agenda that won her favour with Conservative party members, she accepted the inevitable and resigned as leader. This brief episode has unquestionably damaged the UK’s reputation for financial prudence and sound economic management. The outlook for the UK economy remains difficult. Inflation remains elevated, interest rates are rising, and household incomes are being squeezed. The corporate sector is facing higher input costs and falling margins. Against this backdrop, large-cap UK companies, where more earnings are derived internationally rather than domestically, appear less vulnerable.
With all this going on it’s no wonder that global markets are in turmoil! The following chart highlights the number of days in a year when the S&P 500 has risen or fallen by more than 1%. This is one way of putting this year's volatile markets into context.
A one-day move greater than 1% to the upside or downside is considered a big move.
As you can see from the chart, the annual average number of +1% days is 54, going back to 1958 when records began, and the S&P's year-to-date count is 100.
That's a key threshold the index has only reached in 7 other years over the last 6 decades:
1974 (115), 2000 (103), 2001 (107), 2002 (126), 2008 (134), 2009 (118) and 2020 (110).
These years covered the Saudi oil embargo, the bursting of the Dot Com Bubble and the Financial/Pandemic Crises.
Source: Marlborough Multi-Asset Investment Team, Datatrek, Bloomberg, The Verge.
Interestingly, the following year can also have a high number of 1% moves. However, they tend to be more +1% moves. It's often the case that when you get a significant down year, it's followed by a significant up year. The chart below highlights the performance of the S&P 500 after a year of 20% or greater declines:
Source: Marlborough Multi-Asset Investment Team, Datatrek, Bloomberg, The Verge.
So, what is the best way to handle all of this turmoil?Patience and diversification!As you can see from the following chart, it’s impossible to ‘book a trend’ in terms of which asset class will consistently perform well.We live in a world that is constantly changing, and that’s why it’s important to not just look at past performance of any investment fund when considering where to invest.Diversification and time are key!
Mapping from 1997 to the end of 2021 (each asset is colour coded), no one asset is consistently the best performer, showing how crucial diversification is. With the best intentions in the world, an investment adviser does not have a crystal ball! That said, I do believe that a portfolio should be actively managed and a ‘one size fits all’ is not what we are about when it comes to advising our clients. Whether it’s pensions or investments, it’s crucial that your portfolio is well diversified and aligned to your appetite for risk versus returns, together with your income requirements. We take a proactive approach to ensure that we are ready to take advantage of any opportunities as they arise in global markets, giving our clients the best potential for a successful outcome over the longer term.
If you have a pension or investment and are wondering whether your portfolio is sufficiently diversified, please contact us and we will assess it’s potential to offer you the returns and/or income you are aiming for. This service is free of charge and without obligation.
Speed Financial Solutions are a highly qualified and regulated financial services provider looking after clients throughout Spain and the UK. Established in 2010, we provide a discreet and comprehensive service to individuals, and our service is tailored to suit your needs taking advantage of tactical opportunities as they arise in respect of your financial planning.
Our Principal, Andrea Speed, is a qualified Discretionary Investment Manager specialising in Investment and Risk, Taxation and Trusts, and a qualified Pension Specialist. Andrea is also a Fellow of the Chartered Insurance Institute (CII), which is the world’s largest professional body for insurance and financial services in the world.
Fellowship is the highest qualification awarded by the CII (Level 7) and is universally regarded as the premier qualification. It is a major achievement in the financial industry and demonstrates the acquisition of skills and knowledge at the highest of levels. Along with a Fellowship, Andrea is a CII Chartered Financial Planner.
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This communication is for information purposes only based on our understanding of current legislation and practices which is subject to change and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice form a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.
Andrea J Speed FPFS (DM), M.A.
Principal, Fellow and Chartered Financial Planner
Speed Financial Solutions
28 October 2022