Russia attacked Ukraine last week. The markets fell in shock on Thursday before recovering on Friday. On the weekend, additional sanctions against Russia were announced, leading to a crash in Russia-linked assets today.
Our portfolio has held up OK in the circumstances, performing in line with $FEZ .
Although in general we expect to lose more than the index when stocks fall, that hasn’t happened this time because we avoided Russia-linked banks.
Banks with exposure to Russia, such as $UCG.MI (UniCredit Commercial Bank) and $GLE.PA (Societe Generale Group), have fallen more than 10% today, and European banks are down 6% on average. The Russian bank $SBERL.L (Sberbank of Russia) is down 70%, illustrating the scale of losses the wrong picks can cause.
Of the banks in our portfolio, only $SAN.MC (Banco Santander SA) is down around 6%, while the rest are doing better than the European banks index. Santander is a GSIB (Global Systemically Important Bank), so the markets feel it is exposed to any global problem, although it doesn’t have material direct Russian exposure on its books.
The war between Russia and Ukraine is now going to cause an economic slowdown. Rabobank estimates that 2023 growth will fall 1.1 percentage points in Europe, and 0.6 percentage points in the US.
In Rabobank’s view, no recession is expected, however.
We do not have any strong view on the market at the moment. The positives are that:
(1) geopolitical news does not usually move the markets for long and should generally be ignored;
(2) the economic slowdown may put the Fed on pause;
(3) there is plenty of pessimism around. www.yardeni.com/pub/peacockbullbear.pdf
The negatives are that:
(1) Russia may choose to escalate the conflict further;
(2) the Fed may choose to ignore geopolitics and get tough on inflation;
(3) the market decline has been rather orderly, and we do not sense any real panic.
Our approach in this uncertain situation is to hold our positions, while making minor adjustments to manage Russia-related risk.
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$DG.PA (Vinci S.A) was replaced by $FB (Meta Platforms Inc) in order to reduce the European exposure of the portfolio.
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“Is It Time to Sell Stocks?”
-Why not try to avoid situations like Russia/Ukraine by selling before the fall and buying back afterwards? The problem is that it’s very difficult.
– Indeed, the average professional can’t do it. The article quotes a Morningstar study that says, “The failure of tactical asset allocation funds suggests investors should not only stay away from funds that follow tactical strategies, but they should also avoid making short-term shifts between asset classes in their own portfolios.”
– The reality is not quite that simple, as there are a few top traders who appear to be able to time the market. For example: www.cambridge.org/core/journals/journal-of-financial-and-quantitative-analysis/article/abs/do-market-timing-hedge-funds-time-the-market/BE540D51C4FD8E23F120B4B9E71B3EAC
– For 99% of us, though, the research suggests it’s better to buy and hold.