Comment and opinion for retail investors in the UK
Having read the news this morning before I set out to write this piece, I am overwhelmed by the utterly pointless loss of human lives that has been triggered by the lunatic decisions of the Russian leadership. The one thing that is certain is that the number of dead and the level of urban destruction will only balloon from now on.
The unprecendented level of financial restrictions being thrown at the Russian economy by Western authorities is I suspect beyond Vladimir Putin’s expectations. He had ensured that Russia was well supplied with reserves before starting his invasion but they will be running down at a very rapid rate. The popuation has also become nervous and I read that cash withdrawals from Russian ATMs were at over 50 times normal levels last week.
This morning the Russsian Central Bank has set interest rates at 20% and told all companies to sell 80% of their foreign currency reserves, obviously hoping to counter the massive decline in the value of the rouble. I would anticipate large sales of gold from Russian reserves at some stage, which may knock the price temporarily.
I don’t intend this morning to run through the likely exact consequences of this obviously panic reaction: you will be able to work some out yourself, I am sure.
What I did want you to be aware of is that there may well be extreme volatility in the price of some assets as currencies and commodity prices swing rapidly. Furthermore, the inflation headwind will pick up as commodities that come out of Russian and Ukraine (not just oil and gas, but things as diverse as wheat and wiring looms for German cars) are subject to supply issues.
Other more ghastly apects of the war and international reaction to it will bear on markets, of course.
This will all however very likely be temporary, so investors with diversified portfolios should not worry about paper losses and await the buying opportunities that will become obvious when things get back to normal.
You may be interested in modest anecdotal evidence that comes my way because my partner has Russian contacts from USSR days and it is that in spite of Putin’s control of most of the Russian media, at least some ordinary Russian citizens do know what is going on and are appalled.
Not long back, I mentioned that Vanguard had announced that they would be offering multi-asset ESG (environment, social, governance) portfolios built using an actively managed approach, not something one would have expected, although I was aware that they were being criticised for the lack of ESG filtering of their main best sellers.
I initially and incorrecty assumed from the press release information that the products would be managed collections of ETFs (exchange traded index tracking shares), not direct holdings in individual businesses. That is the way the Vanguard Lifestrategy funds work.
I have now read a little more and the following may be of interest to readers who have ESG priorities when making investment calls. I have already written that there is indisputable evidence that more money is flowing into ESG filtered funds than the rest, and so all investors ought to take account of the obvious boost to the momentum factor.
This month the 2 parts of this post are linked. The first is an assessment of the context for making asset allocation decisions in 2022 and the second part is a reminder of why portfolios need to allow for the unpredictable which in one sense is the only actual certainty! None of us can say we know exactly what events will impact our lives in the future, but we can say that there will be events!
We rarely have the opportunity of predicting the future reliably. Naturally, we would like to be able to do so and activities like holiday planning, weather forecasting, getting married and so on are undertaken based on making judgements influenced by our experience, maybe the advice of others and these days some predictions are 100% the outputs of sophisticated computer models.
There is a significant branch of mathematics (statistics) that offers a range of rules and methods to try and deliver at least a way of measuring the probability of certain events happening and those methods are widely used when people try to estimate investment returns.
In the middle of the 20th century, modern portfolio theory (MPT) was devised on the broad assumption that the statistical scientists with their ‘greeks’ (alpha, beta etc) could deduce enough from the past to allow portfolio building to become more of a science and less of a dark art.
In my opinion, that approach is informative but useless on its own. There is clear evidence from all over the investment panoply that past performance is truly not a guide a to the future. Unless we understand why an investment has done well or poorly and the context, both in term of timescale and events, we will never have enough information to make a trading decision.
The process of investing usually requires participation in a market and market behaviour is still mostly human behavior. This means that another branch of science, psychology, comes into play. That is now widely recognised and in the late 20th century the idea of behavioral finance was taken on board by investment market participants.
I often cross check what I have written in the past about economics and markets, partly to see how my looking into the future has inevitably been exposed as frequently ‘off beam’ (this tends to keep my current writing away from the wildest of speculations!) but more to assess what surprises or new trends have emerged and the more common reality: over many periods how little changes in 12 months.
After a longer technical post last week, this week I am going to confine myself to cherry picking a few news items that are relevant for investors who are considering portfolio asset mix balance and possible transactions, like profit taking.
Markets certainly seem edgy at the moment and the odds of a Santa Rally are receding. I suspect that institutional traders are looking to book some gains after a good year, perhaps nervous about the worsening Covid situation in much of Europe.