“I’m sure we are all shocked and saddened by the terrible events in Ukraine and are thoughts are with those who are suffering from this human tragedy. From an economic perspective, the crisis has come at a time when global policymakers are already under pressure from slowing growth and high inflation, largely as a result of Covid-related demand/supply disruption and higher energy prices. The war is likely to worsen the deteriorating macro background, resulting in weaker economic activity and inflation staying higher for longer. Although Russia is a relatively small economy, the impact of sanctions, a growing number of companies pulling back from doing business in the country, even higher energy costs,  a possible Russian debt default, falling financial markets and greater uncertainty will weigh heavily on economic activity. Central banks, and the Fed in particular are in a tough spot. It is under pressure to continue with their plans to raise interest rates and end QE given the inflation concerns. However, it is also acutely conscious of the fact that growth is slowing and the risk of recession is increasing. At the same time, governments are already committing to spending more on energy security and defence in addition to the need to address an underinvestment in healthcare, income and wealth inequality and climate change. In my view, the Fed and other central banks will push ahead with rate rises over the next few weeks and months but will eventually be forced to become more dovish and I expect rates to peak for this cycle considerably lower than market or policy makers expectations. Ultimately, higher energy costs are inflationary short-term, but disinflationary longer-term. Financial repression will last longer as central banks have little option other than  to finance increased government spending and keep financing costs low given the record high debt levels in the global economy.

 

From an investment perspective, markets will likely stay very volatile for some time, not just because of Ukraine but also because of the challenging macro backdrop and uncertainty over interest rates and inflation. The risks for equites and credit markets appear to be skewed to the downside in the near term although markets have already fallen materially in some areas and much of the bad news has probably been discounted. We will see strong relief rallies from time to time but our current emphasis is on capital preservation given the uncertain and changing environment. We have made a number of changes to our portfolios recently as we seek to be more defensively positioned whilst looking to invest in some of the areas which are likely to benefit from the crisis, most notably commodity and energy related plays as well as quality stocks which have suddenly become more attractive from a valuation perspective. In my view, it is too early to increase exposure to risk assets but we will be looking for opportunities to do so over the coming weeks and months. There are a number of catalysts that would lead us to become more bullish and increase exposure to equities, in particular. These include an end to the Ukraine crisis and lower energy prices, signs that the Fed are steeping back from its hawkish bias, significant fiscal or monetary easing from China and signs that inflationary pressures are easing. The post pandemic world is changing in so many ways and successful investment strategies will need to evolve as well but I am optimistic that we can continue to deliver attractive returns for our clients over the next few years from an active, flexible and diversified approach.   “

As always if you have any concerns or questions then please get in touch.

Tel 01733 314553 or email info@brookswealth.co.uk