Staying calm and focussed during the Russia-Ukraine conflict
Most of us probably started 2022 with an optimistic mindset, believing that our lives might soon return to normal after two years of grappling with the effects of the Covid-19 pandemic. Unfortunately, this was not to be. Russia’s invasion of Ukraine has repercussions across the globe, for every economy, ours included.
As a South African investor, we know that you are likely wondering how the crisis will impact your portfolio. It is well known that emotions drive financial markets, and therefore the uncertainty created by the conflict, and the steps taken to cut Russia off from the world, in terms of trade and the financial system, are no doubt on your mind.
At this time, we believe it is prudent to remind you of our approach to investing. Sanlam Investments has a pragmatic value long-term investment philosophy. We believe in the rigour of our research process, the talent and expertise of our investment professionals, and the robust fundamentals of the companies in which we invest. We also draw heavily on investment data from other significant historical events that show that markets inevitably correct themselves. We remain steadfast in our views and our strategy.
However, we know that you, our valued clients, may be feeling uncertain. Therefore, we have engaged our team of investment professionals to provide you with some insight into the current volatile environment.
The global economic impact
Our chief investment economist, Arthur Kamp, believes that, although the negative economic impact will be skewed towards Russia, countries trading with or that are financially connected to Russia will also be impacted. Global gross domestic product (GDP) will likely be revised downwards due to the direct impact of this conflict. Russia accounts for 3% of global GDP, with Ukraine making up less than 0.5% (PPP international dollar). In addition, the broader restriction of trade is a consideration due to the financial sanctions being imposed. Russian imports and exports of goods and services account for 50% of its GDP, with exports being heavily skewed towards energy products and metals.
Kamp adds that if the conflict is contained to Russia/Ukraine, the following could be likely outcomes:
- Commodity exporting countries like South Africa may benefit, should commodity prices be supported if these supply chains are disrupted.
- The spike in oil prices will significantly negatively impact global real GDP, although oil exporters will benefit.
- Exporters to Russia will be impacted as Russia is expected to go into recession. These include but are not limited to countries such as China, Germany, Belarus, the USA and Italy.
- Overall, the global economic expansion is expected to continue, albeit at a significantly slower pace, while inflation remains a concern.
The impact on emerging markets
Feroz Basa, head of Global Emerging Markets, says that higher oil prices will place pressure on already stretched consumers with the potential risk of stagflation. This will have a negative effect on markets. However, if the situation is solved fairly quickly, oil and commodity prices will normalise, and the focus will return to higher inflation and market valuations.
He says that, excluding Russia, emerging markets are in much better shape than during previous crises and are well ahead of the curve in terms of normalising interest rates relative to developed markets. Also, valuations are more attractive.
Basa says that our Global Fund’s exposure to Russia is limited to 4.5% of the portfolio. This means that the sell-off will negatively impact it in the short term. However, most of our Russian exposure is in food retailers. These are more defensive in nature and should recover after the market’s knee-jerk reaction.
The portfolio is well-diversified, and the team actively monitors its Russian exposure. Currently, they are comfortable with the portfolio’s exposure in terms of Russian stocks.
Listen to Feroz Basa’ s views on the impact on emerging markets here.
The impact on fixed income funds
Mokgatla Madisha, head of Fixed Interest, says that we have seen an increase in volatility in the bond markets. As a result, bonds have lost most of the gains they have made this year to date.
It comes as no surprise that the negative sentiment in the market has increased as a result of the recent SA National Budget, which was not as positive as expected, and the current conflict in Ukraine.
He said the team has been reducing the duration of its portfolios in expectation of the increased inflationary risk from oil prices. While inflation seems to be peaking, the disinflationary cycle is anticipated to be slower than initially expected.
The current positioning in his portfolio is mainly informed by the relative outperformance of South African assets than the Russian-Ukraine crisis. Bonds are looking more attractive due to yields selling off from their relatively expensive levels in mid-February.
Meanwhile, South Africa is experiencing improving terms of trade, even as oil prices increase, which provides structural support to the ZAR.
Listen to Mokgatla Madisha’s s views on the impact on fixed income funds here.
The impact on equity portfolios
Our equity portfolios have large overweight positions in local resource companies listed on the Johannesburg Stock Exchange (JSE). The current situation supports this view, as long as global GDP growth does not slow down significantly.
Our equities team expects markets to remain fragile but for the South African market to be resilient. It is important for investors to stay calm, despite the devastation unfolding right now. Myriad case studies have shown how wealth can quickly be eroded when clients make hasty changes or exit the market in volatile periods. Market volatility is nothing new. However, time and again, history has shown that markets do recover – sometimes quite rapidly.
Listen to Andrew Kingston’s views on the impact on equity portfolios here.
Multi-Asset – Absolute Return portfolios
Portfolio manager Fernando Durrell expects increased volatility in the markets from riskier assets. He believes that the fund is currently well-positioned due to its exposure to hard currency, rand-hedge SA equities, the use of protective structures and notable exposure to interest-bearing assets. Diversification remains key, and it is important to find the balance between protecting portfolios from negative returns and taking advantage of growth opportunities as and when they arise.
The team remains confident that their disciplined process, strong focus on downside risk protection and modelling of various scenarios provide a solid foundation to offer their clients inflation-beating returns over the medium to long term.
To weather this crisis and avoid unnecessary losses, it is essential to remain invested and trust your portfolio manager to ‘steer the ship’ through the storm.
Now is the moment to avoid making fear-driven decisions regarding investments. Sanlam Investments is your partner on this journey. We are here to help you navigate this period every step of the way. Please reach out to us directly for more insights or to talk in more detail about this important topic.
Our thoughts and hearts go out to the innocent people affected by this horrific crisis. We hope and trust for a speedy end to this conflict.