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Without a doubt, over the past two years investors have had to tolerate – and navigate – a hefty amount of market volatility. The primary driver has been the coronavirus pandemic, but more recently the onset of tighter monetary policy and Russia’s invasion of Ukraine has ushered in a fresh wave of uncertainty.
Russia’s actions will likely have a significant economic, as well as human, cost. The escalation of political tensions into military conflict triggered a sell-off in global stock markets and sent the price of oil above $100 a barrel for the first time in seven years. As well as market volatility in the short term, there are potential implications for global energy supplies, the path of inflation and interest rates and more.
Geopolitics and international relations have always had a major influence on financial markets and investment performance – from a lack of clarity in public statements from senior politicians, to ongoing trade wars, or at the other end of the spectrum, military conflict. History has highlighted on a plethora of occasions that investors dislike uncertainty. This is especially true when it’s the result of political, or monetary policy, rhetoric and wrangling - the words and actions of politicians and policymakers can, and do, have an impact on markets.
The temptation to cash out at the first sign of trouble can result in investors crystallising their losses and potentially missing out on any subsequent recovery. For investors with a stronger constitution and higher long-term risk threshold, bouts of short-term volatility – whether driven by politics or not - can offer the opportunity to pick up high-quality assets at a discount.
For example, what occurred in 2020 was unprecedented, but despite the market swings, global shares ended the year over 10% higher as the development of vaccines and the impact of unprecedented government and central bank stimulus helped buoy sentiment.
If we look at the military events of the past 50 years - and while past performance should never be viewed as a guide to future returns, we can learn some interesting lessons about volatility. After the Iraq invasion of Kuwait in 1990 the market had rebounded within four months; after the terrorist attacks in the US on 11 September 2001, it took the market three weeks to recoup its losses.
Political risk is not going away anytime soon. This year will see key elections take place across developed and emerging markets. The US mid-term elections take place this November, with the primaries process having already started in March. More than a third of Senate seats and all 435 voting seats in the House of Representatives, as well as several high-profile state governor seats, will be contested.
What is clear is that political events and decisions will always drive volatility in financial markets, to varying degrees. For investors with a stronger constitution and higher long-term risk threshold, bouts of short-term volatility can offer the potential opportunity to pick up high-quality assets at a discount. As such we believe it makes senses for investors to remain focused on their long-term investment goals, as opposed to getting caught up in short-term market panic.
This week will be the last client update until the 29th April, so please do look after yourselves and have a lovely Easter.
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