Market View On The Russia & Ukraine Conflict
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As all of you would have known by now, a full-scale invasion of Ukraine appears to be taking place.
In my previous video on my market outlook for the year 2022, I highlighted that I expect it to be a rough year for the markets and the Russia Ukraine conflict just made it an even rougher year.
That said, I do want to shed some light on my view of the markets about this matter.
Once again, nobody knows if the market will go up or down in the future, what we can do however is to work with the facts we have at hand to form a view based on probability and position ourselves accordingly.
Looking at the facts
Let’s start by examining the past performance of the markets, in this case, S&P 500, during times of war and conflict.
From the above chart, we see here that the market had registered a positive return 75% of the time after 12 months of a significant geopolitical or military event like that’s happening today.
The times where the market provided a negative return is when it was accompanied by periods of recession at some point during the measurement period.
That said, we must also acknowledge that times today are different from the past.
Going back to the topic of valuation, you will realize that in all previous times of conflict, the market had been trading at a valuation that was far lower than what we are trading at today both in the measure of Shiller price to earning and your normal price to earnings ratios.
The only exception to this was during 2001 when the price to earnings was higher than the values that we are trading at today and of course, the market registered a return of -18% during that period.
The implication of the conflict
Now that we understand the past behaviour of the markets during times of conflict and the current valuation environment that we are trading in, what are the implications of the Russia Ukraine conflict, in particular to our investment portfolio?
The immediate implication of this conflict is the impact it has on global inflation.
Like it or not Russia plays a huge role in the commodity market as they are one of the major exporters of gas, coal, petroleum, wheat, etc.
That said, the conflict itself is expected to increase the price of commodities, raw materials and finished goods which would further exacerbate the global inflation situation that many countries are trying to control at the moment.
We’ve already seen a steady increase in prices of wheat and crude oil since the beginning of this year and this conflict would add more fuel to the fire.
This is important because, central bankers, especially those in Europe, run a higher risk of triggering a recession as they try to curb the rising inflation rate problem while balancing between the uncertainties and deteriorating business and consumer confidence.
And as we’ve seen from the past performances, a combination of recession and conflict usually results in a poor performance over the next 12 months.
All things considered, my general stance towards the markets remains unchanged.
As I’ve mentioned in the 2022 market outlook, I believe that the US market has more room to correct given the expensive valuation that it is trading and in the process of the correction in the US market, the Asia markets will also experience further price decrease given the correlation between these two markets despite being fairly priced.
With the current conflict that is going on between Russia and Ukraine, I think what is likely to happen is that it will accelerate the pace of the correction both in the US and Asia markets and chances are is that prices may trade sideways and stay depressed for a prolonged duration after the correction.
The reason for expecting a prolonged consolidation after the correction is because I think that the market needs more time to recover fundamentally given the additional problems and challenges that the Russia and Ukraine conflict may have on the global economy.
Overall, I think that there’s no need to be alarmed with the price developments in the coming year though I get that it sucks to see your investment performing poorly during such times.
Remember that the strategy that we are running is longer duration of nature and these short-term ups and downs will eventually be ironed out as the fundamentals of our investment recover and continue to grow over the next 5, 10 and 15 years.
For my dear clients, as the markets continue to correct, I will call for additional funds to buy the dip as I’ve previous briefed you guys back in December last year. So no action is needed for now and there is no need for you to worry too much about your investments as I am here to help you manage and navigate through times like this.
If you have any concerns about the market or if your financial plans have changed since we last spoke in our annual review, please sound out to me and we can schedule a meeting to run through your financial plans once more and ensure that the investment portfolio is aligned.
For non-clients or clients who is not currently investing with me, if you don’t have the time, knowledge or interest to manage your investment, you can check out what I do on my website to see how you can benefit from my investment planning services and reach out to me directly.
Daniel is a Licensed Independent Financial Consultant with MAS and a certified Associate Wealth Planner that provides:
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This article is meant to be the opinion of the author
This article is for information purposes only
This article should not be seen as financial advice
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