After a nervy start to the year, investors would have started the week hoping for news to calm the stock markets. They got the opposite.
If persistent fears around inflation weren’t enough to muddy the waters, markets now have a new and very real threat to contend with.
Fears of a potential Russian invasion of Ukraine continue to escalate, with both the U.S. and UK governments removing some of their diplomats from the Ukrainian capital.
War footing: Fears of a potential Russian invasion of Ukraine continue to escalate, with both the U.S. and UK governments removing some of their diplomats from the Ukrainian capital
By the end of Monday, the FTSE 100 had fallen by 2.63 per cent, while the smaller FTSE 250 lost 3.64 per cent, taking it to its lowest level for ten months.
The effect was felt across Europe, where the Stoxx 600 — the Continent’s major stock index — dropped by 3.50 per cent.
‘The potential for conflict in Ukraine is adding to a loss of investor confidence across the board,’ says Susannah Streeter, a senior analyst with Hargreaves Lansdown.
‘With parts of the world economy still grappling with Omicron, markets are now worried that a conflict in Europe could upset the longer-term recovery.’
These sweeping losses will almost certainly have weighed on even the most diversified investment portfolio.
That said, most experts agree that the biggest preoccupation for the stock market is not Russian troops (at least not yet) but the ongoing cloud around inflation.
With the U.S. Federal Reserve expected to tighten its monetary policy within days, markets are already on the back foot. And, after a few surprises in recent months, they haven’t ruled out the possibility of the Federal Reserve going further than expected, which is adding to nervousness.
An ongoing sell-off of tech stocks —whose lofty valuations depend on the kind of cheap borrowing that may soon be a thing of the past — has continued into its fourth week.
The tech-heavy Nasdaq-100 index, which contains Amazon, Apple and Microsoft, has officially entered correction territory, defined as a fall of more than 10 per cent.
The biggest casualty in the pack is Netflix, which has now fallen by 38.14 per cent this year, after signs that its pandemic growth is tailing off.
The prospect of conflict between Russia and Ukraine has only lifted one thing — the price of natural gas.
Earlier this week, investment bank Goldman Sachs warned that an outbreak of war would mean gas prices shooting above the levels of last autumn and winter, potentially derailing Europe’s economic recovery.
Even defence stocks such as Saab and BAE, which would benefit from other European countries deciding to bolster their military hardware, have been largely muted.
Market mayhem: By the end of Monday, the FTSE 100 had fallen 2.63%, while the smaller FTSE 250 lost 3.64%, taking it to its lowest level for ten months.
But while it makes for a pessimistic picture for investors over the short term, experts caution them against acting too hastily. While markets often fluctuate, these movements have a habit of cancelling out over time.
Indeed, yesterday there were signs that European stocks were already beginning to recover from the falls prompted by fears over a Russian invasion of Ukraine, albeit slowly.
F urthermore, if you choose to sell up when overall market sentiment drops, you risk missing out on the recovery and essentially locking in your losses.
‘Our advice to investors is to tune out the noise,’ says James Norton, a senior financial planner with investment firm Vanguard.
‘They should control what they can — which means keeping their costs low and maintaining an appropriate mix of equities and bonds that are globally diversified to reduce the risk.’
It may not seem like the most comforting advice. Yet, as Mr Norton points out, it has consistently held up over time.
‘Whether it’s Brexit, U.S. elections or the current events in Ukraine, economic and geopolitical events are an inherent part of investing,’ he says.
Investors who hold mixed-asset funds, such as Vanguard’s LifeStrategy range or Blackrock’s MyMap, may benefit from their potential to withstand turbulence. Their blend of equities and defensive assets (such as high-quality bonds) has typically held up well; LifeStrategy 80 per cent has turned £10,000 into £14,700 over five years.
As for natural gas — which has risen in price since tensions with Russia resurfaced — investors will struggle to find many funds that can cash in on another price spike.
One option is TB Guinness Global Energy, which invests in big energy firms across the U.S. and Europe.
Although its long-term performance is poor, the fund is up by more than 30 per cent in six months.