Darren explores the recent Geopolitical Developments surrounding the Russian attack on Ukraine and European Security Crisis – and considers how client portfolios might be affected.
We always knew that Donald would seek to ‘do a deal’ with Moscow in regards to the Russian invasion of Ukraine. The Republican view in the US is that Russia was entitled to invade their neighbour due to feeling threatened by an ever encroaching Nato presence on their Eastern border.
To understand the media feeding frenzy of utter panic in the past week, we probably need to step back a little.
I am a huge fan of Marshall Rosenberg’s book ‘Nonviolent Communication’ which always tries to ‘flip’ a conflict on its head. The trick to successful dispute resolution is to start by showing the other side that you actually get their grievance. This isn’t always easy – but Mr Rosenberg argues it is better to think about what you want to actually gain from the situation – rather than score points. This makes sense to me.
So, in a way, the Trump administration have gone straight in for the ‘Mr Putin, we really understand your grievance’ approach. So far so good.
The trouble is that they also couldn’t resist berating their European allies and roundly pulling the rug out from under the feet of a peace process that has worked effectively for many decades.
The situation in Ukraine looks very different for Europeans as well. It was not so long ago that the Soviet military machine steamrolled across eastern Europe – throwing an ‘iron curtain’ over vast swathes of countries. Could this happen again? Mark Twain’s famous quote – ‘History doesn’t repeat itself but it rhymes’ may offer some troubling clues here. Moscow has a proven appetite for expansion.
The Trump administration are not likely to trouble themselves if Putin grabs a bit of eastern Europe. Their eyes are on China and Iran. From their perspective, the Ukraine war is absolutely bonkers – sucking in a vast amount of their own wealth at a time when wealth is harder to come by (unless you own a huge tech company).
There is now genuine fear amongst European nations that they are on their own against a Russia that is quite incredibly being ‘egged on’ by their historically most important ally.
At the same time, spare a thought for Ukraine, who are being publically slapped down and worse (it would seem) being told that they will now need to cede land to Russia and their precious minerals to America.
It is hard to see any positives in this situation. Surely, war with Russia is now inevitable and how will this impact our clients’ portfolios?
Firstly, war isn’t inevitable. It is possible that a tentative cease fire will be ironed out this week – with a new boundary imposed on Ukraine. Whilst this is morally reprehensible for many of us European nations. It may enable Moscow to take the ‘off ramp’ from this conflict.
I don’t think anyone trusts the Putin administration to ‘play nice’ in future. However, a ceasefire could work for some years if Ukraine is then reorganised to offer a much tougher target in future. Whether this is achieved through some kind of European peacekeeping force – or through a new nuclear arms race – I just don’t know.
What we do know is that markets hate uncertainty.
And here is the really weird thing. At the point of writing, the FTSE 100 stands around its all-time high – buoyed by defence manufacturing stocks, mining and oil and underpinned by a stronger US dollar helping UK FTSE 100 exporters.
The S&P US Equity index also stands around its all-time high – buoyed partly still by the ‘tech’ story but also by defence, oil and a general ‘Trump bounce’.
This makes little sense. If there is one thing that the Trump administration has caused in the past month – it is monstrous amounts of uncertainty.
But wait!
Equity markets just aren’t seeing that. Equity investors appear to be seeing certainty. They see a US administration that is actually bringing the Ukraine war to a close (even if only for a season) thus potentially saving billions in US military expenditure and reducing inflationary pressures. They also see a US administration that is very clear about its policies both at home and abroad.
Bond markets aren’t as calm though. Both UK Gilt and US Treasury yields are still at eye-watering high points over a five-year chart. The yields have fallen back slightly in the past weeks – but they still have a long way to go. Higher Bond yields mean existing Bond prices fall. This is painful for traditionally more cautious investors.
It is fair to say that Equity markets are happy enough with the current Geopolitical situation but Bond markets remain concerned. Bonds need lower inflation and reducing or stable interest rates to perform. These vital ingredients appear lacking from the Trump administration playbook.
So where does that leave our treasured clients?
Well thankfully, we believe in good old fashioned diversification. Our more cautious portfolios have felt the ‘drag’ of those traditionally more cautious Bonds. However, the inclusion of some Equity funds has provided a counterbalance of growth. In the more adventurous portfolios, we have seen fairly pleasing results and we hope for a weakening of the US dollar to help Emerging Markets in the coming year or so.
We shall be conducting our full quarterly proactive portfolio reviews next week. This is the point where we ‘backtest’ all eight of our model portfolios to see how they are behaving against different benchmarks. We will then be in touch with all of our Proactive and Pro-Ethical clients to update them on progress – together with any important switching recommendations if applicable.
The coming months will certainly be ‘interesting’ as we consider the impact of the new Trump administration – but at this stage it is fair to say that Equity markets are taking it all in their stride.
As ever, please don’t suffer in silence! If there is anything at all that you would like to chat about – you know where I am.
My very best wishes as ever
Darren
