Hard on the heels of last week’s newsletter article about investment volatility, a further crisis has erupted which we felt we should provide some comment on.
It feels somewhat crass to be writing to you about the prospects for your investment and pensions portfolios, when a sovereign and independent state is being invaded by an authoritarian aggressor, but these issues are material to all of us and will affect our economies and our personal finances over the forthcoming days, weeks and months….and probably for years.
It is too early to understand precisely Russia’s military goal or the impact of further sanctions and counter measures from the West. One of the most punitive measures being discussed would be to cut Russia off from SWIFT, the high security network that facilitates payments around the world. This would however, also impact Europe which would find it hard to pay for Russian gas, which currently supplies 40% of Europe’s need (Reuters). It is yet further evidence of the global economic interdependence that we have built, that we are likely to continue to take oil and gas from Russia whilst our politicians castigate Putin on the global stage. Putin has spent much of the last few years building a “Fortress Russia”, boosting foreign exchange reserves (and, unlike the West, spending little on any Covid support measures to citizens), leaving him in a strong position to reduce the impact of any military measures that the West may threaten.
Whilst the Russian economy is relatively small in global terms and investments in this market are rare, it does account for a large part of the fossil fuel energy supplies in Europe. Sadly, in the west and UK in particular, we have seen short termist polices by Government, favouring cheap gas over building long term renewable energy security. It is very likely that rising energy costs will impact both our personal cost of living but also the ability for business to function normally.
Ironically the gas reliance and rising commodity prices will swell the coffers of both the Russian Treasury and Oligarchs but will also buoy the fortunes of mainstream investments funds that have not taken such a climate aware stance as the majority of funds that we invest in for you. If ever there was a time for a windfall tax on fossil fuels – it’s now. In times of stress, markets react negatively and often boost the value of ‘defensive’ stocks, (which include gold, tobacco, alcohol and indeed armaments) that are also generally excluded from the funds that we use. So, in the short term therefore, you should expect underperformance against mainstream funds. That roller coaster that I referred to last week is likely to get even bumpier.
Accepting that, this time it is different; this is a conflict in mainland Europe with a very real risk of a wider conflict, history has shown us that the global economic cycle tends to keep on moving and adjusting to new realties. If we look back to the Crimean annexation, Russian support in Syria, the US invasion of Iraq or even the preceding Iraqi invasion of Kuwait – markets have settled and adjusted relatively quickly. Our initial review of commentary coming from fund managers that we use, suggests that they remain confident in their positioning and long-term investment themes
Whilst it’s not the impetus that we would look for, it seems likely that western nations will seek to step up fuel security measures. We believe events reiterate our core beliefs: the increasing importance of local and secure forms of energy to protect nations from reliance on fossil fuel exporters. Given space and natural resource constraints, energy security is heavily linked with renewable technologies. This point was emphasised on Saturday by Ursula von Der Leyden, the President of the EC: “We are doubling down on renewables. This will increase Europe’s strategic independence on energy,” she said (Munich Security Conference).
In the meantime, our thoughts are with the Ukrainian people and hopes, forlorn as they may be, for the continuance of a democratic state.
It is important to take professional advice before making any decision relating to your personal finances. Information within this article does not provide individual tailored investment advice and is for guidance only. We cannot assume legal liability for any errors or omissions it might contain. Ethical Futures llp is authorised and regulated by the Financial Conduct Authority.