What does the Russian invasion of Ukraine mean for expat investors in Europe?
We have all spent the last two years managing our families, our jobs, our finances, and our lives through the extraordinary epoch of the coronavirus pandemic. Now, as countries begin to remove restrictions and optimism for less restrictive life returns – and maybe smoother markets, we are faced this week with the Russian invasion of Ukraine.
This has been in the news for several weeks as tensions have escalated to the point, yesterday, 24/02/2022 when the Russian military invaded the country.
In times of conflict and geopolitical risk, market uncertainty increases, and all markets tend to react strongly to the latest news, with short-term changes in direction. This can impact stocks and bond markets as well as commodities, such as the price of oil and gas, as we have seen this week.
Our focus here is on the financial impact of this conflict and how it may affect the investments of expats living in Europe. We are aware this event brings tragedy and suffering to many people on a larger scale. Our thoughts go to those in our network that are directly impacted.
What have the markets done?
The Morningstar graph below shows the stock market fall in value in January and February 2022, caused in part by this geopolitical instability. Importantly it also shows the number of times in the last 2 years that markets have experienced downturns of various sizes. The consistent observation is that after a market downturn, there is a recovery.
The summary of what has happened in the last day is that the market reactions were fast but stabilized somewhat, and were moderate but not extreme. The other point of note is that this is extremely short term.
The big question for expats in Europe, as we face this latest uncertainty is: what should you do?
Should you react?
There is often a compulsion to react when we see markets to headlines, such as in this case of invasion. This can be the fear of losses and the desire to sell, or the opportunity for gains and wanting to restructure your portfolio to buy in and take advantage of dips. Both reactions can be fraught with danger.
You may have heard us say this elsewhere, and we will repeat it here, that it is very difficult, indeed almost impossible, to time the market, by selling and re-buying. In most cases, investors that try this, end up losing out.
Our position: you need to assess your situation in relation to your specific needs and circumstances, and if you do not have a short term need for the capital, you may be better off keeping your investments aligned to your long-term objectives.
Remember markets do trend up over time, but not in a straight line. If markets are rising, after a while they will fall. And markets that are falling will eventually rise.
The false security of cash
Another action some investors take is to stop any regular investments they are making and hold their assets in cash. An advantage of regular investing, whether it is weekly, monthly or quarterly, is that you get to invest at an average price, including at lower prices when the markets fall. By pausing, you are restricting yourself to investing in rising markets at higher prices.
Our position to regular investors is to be consistent and to remember that, in the current environment of rising inflation, cash can actually be a risky investment. Higher inflation means you erode your purchasing power more quickly, or put another way, your money becomes worth less over time. If inflation is 3% per annum, and you hold your funds in cash at zero return, you will effectively lose 50% of value over 24 years. So, while cash might seem a safe bet, it can be a longer term risk to your wealth.
Stay focused on goals and valuations
This is a sensible and prudent strategy if you don’t have short term needs for your capital, but it can be harder to do in volatile markets than it seems. By staying focused on two things: your long term objectives, and fundamental investment valuations, you can avoid reacting to volatile market movements.
It can be difficult to hold the line in a sea of information with headlines full of hyperbole. Remind yourself that decisions you make about your investments should not be done on the basis of headlines or social media opinion.
Draw on the experience of history
We have managed clients through several market downturns including the volatility of the Iraq War and the September 11, 2001, attacks. Our experience in these conflicts taught us that short term volatility can be stressful but that markets do indeed recover. This is shown in the analysis from LGT Vestra with data sourced via Bloomberg of the impact of conflict on markets going back to 1939:
In summary, when markets are more volatile, it is normal to feel more stressed about your investments. If you are considering what to do, and whether you need to change your investment, focus less on the short-term movements in the market and more on your needs. This means your immediate needs to access the money, and your goals and objectives. Focus on the question of whether you are on track with your goals and if your current investment has the fundamental attributes to get you there.
If you are concerned or would like to speak with someone to understand the situation in more depth, you can contact us at info@blackswancapital.eu and we will be happy to speak with you directly.
