If it wasn’t bad enough that the world is grappling with the current and trailing effect of Covid, we are also unfortunately witnessing the next serious conflict. Having personally experienced the Iran/Iraq war, where I sadly lost family members and even had my own brother injured on the front line, I can attest to the fact that nothing good comes from it. The sad loss of life, freedom and the aftermath of pain and suffering is real, and our hearts go out to all of those effected.
With a hot and cold impact on the markets, I felt it appropriate to drop you a quick note purely from an investment and economics point of view so that you have some comfort, politics aside.We have been following the events to better understand the impact of this conflict so that we can best support you going forward. In short, whilst there are a number of negative factors, the ripple effect is expected to impact Europe and USA potentially more than here in Australia, where other domestic matters such as the effect of China and the election are at the forefront.
Conspiracy theorists are speculating that this is just the first conflict, with the second being a greenlight for China to invade Taiwan. Should this occur, this will likely have a bigger impact on Australia as it is likely that USA would play a more active role. It is inevitable that there will be some type of negative impact every so often on the markets. Many factors make the markets go up and down, with conflict being one of the things that rears its ugly head every so often.
For us, it is a matter of understanding whether this will be a temporary matter (few months to a few years) or a structural change (a few years to 10 years+). Our approach with temporary matters is “hold steady” and if an opportunity presents itself, accumulate more of the great investments we have at lower prices, effectively buying more units along the way. However, with structural change, this requires a more defensive investing approach. At Moneyclip, we have been adding lower volatility and varying types of investments to our portfolio since mid-2018, which will ensure that we are reasonably placed for these short-term changes.
It is important to understand that the market is forward looking, seeing through the current situation into the next few years at any given time. Effectively every time you buy shares, the price paid for a company is the promise of making profits in the future and is not based on what has happened in the past. Therefore, the rise and fall you experience in the market is normally due to this future expectation.
Here are some brief points about the current conflict:
- There is minimal direct trade with Russia, and this means that your favourite Vodka is probably the victim of boycotts. There are however plenty of other substitutes (Polish, Scandinavian and yes even from Sydney) so don’t despair!
- NSW Government is dumping their Russian loans in protest and are boycotting other Russian items
- Russia itself will go through tough economic sanctions with restrictions on their overseas assets, trade, flow of funds and the overnight news that they have raised their interest rates to 20% since the Rouble’s value has plummeted.
- There will be higher oil and gas prices impacting our trading partners, with the main impact hitting Europe. Moneyclip have recently been de-risking out of the EU and will continue to do so over the course of the year.
- Higher energy prices will fan the fire in higher inflation, though from what I am reading regarding the ripple effect, it will be less impactful in Australia – Time will tell.
- With uncertainty we will see some more volatility in the share markets and our wealth value. The largest source of wealth in Australia is ‘the home’ so direct impact is less, although our Supers will probably be effected in the short term. Here, holding steady is key.
- There may be some delays in businesses hiring or investing just to see what happens.
- Reserve banks around the world may delay or reduce the potential increases of rates. Here in Australia, the first look will be August and beyond, having had 2 CPI quarters to base the decision on, and of course post the election period.
- The winners will be our energy-based companies as they will drive higher costs for their exports, and the government will of course collect more company taxes due to these higher profits. WA/QLD and NT will probably benefit the most.
- A decline in prices as mentioned above will give the opportunity for us to buy more of the quality investments we have at lower prices.
There is much to keep track of and of course the Moneyclip team will monitor the situation. At this time ‘holding steady’ is our approach.
If you wish to discuss anything in this regard, please don’t hesitate to contact us on myadviser@moneyclip.com or 02 9299 2292.