By Rupert Thompson, Chief Investment Officer at Kingswood
Many client portfolios have registered reasonable falls since the start of the year as a result of losses on both fixed income and equity holdings. These have in large part been caused by the surge in inflation which has led central banks, particularly in the UK and US, to accelerate their monetary tightening plans substantially. However, the crisis in the Ukraine has recently added to the downward pressure on equities.
Some market turbulence is the norm when central banks start raising rates and is not unexpected. Importantly, equities tend to resume their upward trend within a few months and we expect this also to be the case this time. Even with the increases planned, interest rates will remain low by historical standards and economic growth should remain quite strong over the coming year.
As for the Ukraine, markets have reacted calmly to the latest escalation, which saw Russia lay claim to parts of Ukraine, triggering a range of Western sanctions including German suspension of a major new gas pipeline. UK and European equities ended yesterday little changed and are actually up 0.5% or so today. US equities suffered a bit more, falling 1% yesterday but indications are for some recovery today. The oil price, meanwhile, rose only a comparatively modest $2 or so yesterday to $97/bbl.
Global equities are now off around 8% from their early January high and slightly below their late January low. Near term, the crisis could clearly worsen further if Russia, as is quite possible or even probable, extends its move further into the Ukraine and Western sanctions are intensified. This would very likely lead to some further decline in equities and possibly a surge in oil prices well above $100/bbl. Higher oil prices would exacerbate the sharp rise in inflation, increase worries of a wage-price spiral and mean central banks would very likely stick to their tightening plans even if equity markets fell back significantly further.
Even so, the experience of most geo-political crises in the past is that equity market falls tend to be relatively short-lived, with markets regaining their losses within a matter of months. Even in the Gulf War of 1990, where markets were still down 11% after three months, they had regained all these losses within six months.
The market falls are also expected to be relatively short-lived this time. At the end of the day, the Ukraine crisis and rise in rates should not derail the global economic recovery. We still believe equities have upside on a 6-12 month view and will outperform cash and bonds. So, our plan is very much to ride out the current volatility in equities and take advantage of any opportunities which crop up.
