Never let a good crisis go to waste

Russia’s aggression over the past few weeks has sent shock-waves through financial markets, with equities potentially at risk of more downside over fear of further escalation and uncertainty.

The temptation to sell into this weakness is understandable; however, accurately predicting the trajectory of geopolitics is fraught with danger.

We caution our clients not to succumb to emotive impulses during heightened market volatility, as indiscriminate selling is often followed by sharp relief-rallies which active managers can exploit, which we have experienced over the past seven days with a 5% rally in the Aussie markets.

The Russian invasion has clearly exacerbated concerns over energy supply, adding further upside to energy prices and several other key commodities. Russian was providing over 60% of Europe’s energy needs, with the Ukraine having large reserves of uranium ores and the second largest iron ore reserves in the world. Furthermore, Ukraine is an important agricultural country with the capacity to feed 600 million people each year. This has clear inflationary implications and may, if sustained, ultimately undermine growth.

From a financial perspective, this provides an investment opportunity within the energy and soft commodities sectors. However, it does not come without risks, especially if conflict de- escalation is achieved and sanctions are dropped.

It is too early to say if this will change central banks’ tightening plans, as it depends on how long the conflict lasts and the extent of any flow on to growth and inflation. Further sanctions and Ukraine resistance could provoke increasingly aggressive responses from Russia, or they could pave the way for negotiations. Putin needs to be offered an exit ramp that allows him to save face with his people.

At this stage, central banks are unlikely to alter their plans for “normalization” although they will likely tread a little more cautiously and, as usual, their actions will be data dependent. We have seen this occur with the Fed Reserves first rate rise in March 2022.

Throughout the March market correction, it’s been encouraging to see our alternatives dampen volatility and enhance risk-adjusted returns.

Furthermore, with the view of prolonged volatility, the ability to profit in falling markets (shorting) continues to buck the trend and generate attractive gains for our clients.

Never let a good crisis go to waste

Importantly, periodic and sharp falls in markets are normal, and attempting to tactically sell and re-enter is notoriously difficult to achieve. Historically, geopolitical events have resulted in aggressive sell-offs, followed by relatively swift recoveries, so we implore investors to retain their long-term investment strategies.

Although it might be difficult to maintain a dispassionate outlook as the fog of war descends, remember that markets will bottom well in advance of a positive shift in investor sentiment. If history is anything to go by, you should never let a good crisis go to waste, so don’t go the nuclear option.

Time in the market not timing the market

If you were to miss the 20 best days over between October 2003 to December 2017, you would have missed out on 57% worth of returns.

That is enormous to think over a 14 year period if you were only to miss the 20 best days in the market your returns would be 57% worse off.

For $10,000 invested that equates to a $19,600 difference

For $100,000 invested that equates to a $196,000 difference.

For $1,000,000 invested that equates to a $1,960,000 difference.

They are some big numbers for missing a few days over a 14 year period.