Sovereign Wealth Partners and InvestSense Pty Ltd
After repeated warnings from Western intelligence, most of which geopolitical experts were sceptical of, Russian forces invaded Ukraine on the 24th of the month. This unfortunate development is very concerning on a human level, and we certainly hope that cooler heads prevail, and a solution can be found.
We would like to express our deepest concern for those impacted by the current conflict, however, for the purposes of this commentary we shall attempt to focus solely on the events that transpired within markets, as uncomfortable as it may seem.
The immediate market impact following the invasion could be seen as an accentuation of trends observed throughout the month. These were namely an increase in oil prices, with Brent Oil surpassing $US100 per barrel for the first time since 2014, an increase in the price of gold, which edged towards its all-time high, and a fall of between 3% to 4% in major equity indices.
The Australian equity market stood out with respect to global peers, up +2.1% throughout the month. This was broadly a continuation of pre-existing trends in which investors favoured investments likely to benefit from higher inflation and interest rates, namely Materials, Financials, and Energy, of which constitute over 50% of the Australian market. At the other end of the spectrum, IT and higher-growth Consumer Discretionary companies experienced reasonable declines.
Internationally, given its similar composition to the Australian market, the UK (FTSE 100) was among those that fared best. Japanese equities held up comparably well, while the US, Europe and emerging markets experienced reasonable declines.
Gold was once again among the best-performing assets (up +4.4%) as investors flocked into the relative safe haven, notably increasing as conflicts intensified.
Long term bond rates traded in a range towards the end of the month, having risen strongly earlier in the month and especially in Europe. Credit spreads continued to ease with some early signs of slight stress in the European high yield market and some emerging markets.
Market Returns – 1 Month to 28 February 2022 (in AUD)
With respect to the Russia-Ukraine conflict, the market’s response has so far been broadly in line with expectations in the face of such an event. The conflict may have wider implications for other geopolitical fault lines (including one closer to us: China-Taiwan), but the equity and gold market’s reaction must be put into their wider context. These trends have been in place for the past 6 weeks and are as much to do with the prospects of rising inflation and interest rates than anything else.
From the perspective of our portfolios, we think it is important not to over-react to such developments and to acknowledge that we don’t have an edge over other market participants when it comes to predicting what happens next. As always, we remain focused on long-term expected returns and reaching investment objectives.
Our portfolios have been broadly neutrally positioned meaning we haven’t been overweight growth assets in the current environment. As often is the case, periods of high volatility can create investment opportunities so if some asset prices become attractive enough and where we feel that we could get appropriately rewarded for any additional risk, it may present an opportunity to deploy some of the capital we have reserved in defensive parts of the portfolio.
As always, if we decide to make any changes as a consequence of our investment process and market movements, we will keep you updated of any portfolio change.