by Charles Cheng, CFA
The past few weeks have been marked with multiple crises. From the Russian invasion of Ukraine to the breakthrough of COVID-19 in China to extreme heat being recorded in the Earth’s poles, the consequences can be severe or already are. The current tragedy and suffering from these events should not be overlooked. The scope of this column, however, will be limited to personal investing.
Over the past month to March 21, world equity markets tumbled in response to the military conflict as well as inflation fears from supply shocks to Russian oil & gas and Chinese manufacturing, before subsequently recovering. However, oil prices have continued rising and so have soft commodities with much of the world’s food output coming from Russia and Ukraine.
在截止至 3 月 21 日的過去一個月裡，世界股市因軍事衝突以及對俄羅斯石油和天然氣和中國製造業的供應衝擊而引發的通脹擔憂而暴跌，隨後有所回升。然而，石油價格繼續上漲；而由於世界上相當比例的糧食產量來自俄羅斯和烏克蘭，也使得軟性商品價格繼續上漲。
The Russian ruble dropped almost by half following international sanctions and many Russian stocks fell as much as 90% before their trading was suspended. Global equity markets did not anticipate the risk of the Russian invasion, despite the public warnings of intelligence agencies. They may now be underestimating the follow-on risks. A global food shortage may lead to political conflict and then economic damage. Unexplained weather events like at the poles can accelerate the climate crisis beyond what scientists can be expecting. A wartime incident could bring the world’s two biggest nuclear powers into conflict. While these things may not be possible to act on at the moment, one should not rely on market action to inform the likelihood of future events. An efficient market needs to be unpredictable but not necessarily accurate.
This episode is also a stark reminder of country risk. Both the attacking and defending country’s financial markets and economies are being devastated by the war. While some argue that the benefit of global country diversification is decreasing because the world financial markets are increasingly correlated, there are still major local political and event risks that can be mitigated. It doesn’t matter how well you analyze companies or economies if you aren’t diversified out of a country that has entered a crisis.
Going forward, the world has undoubtedly changed, even if the market levels are not much different than from the start of the month. Does this mean you should do anything to adjust your investment strategy? If you’re highly concentrated in assets that could be heavily affected by another single political decision or disaster, then you should probably diversify or prepare contingency plans in advance. Otherwise, if you believe your strategy can compound long term through multiple types of market environments without much adjustment, then it probably is also resilient against future events, predictable or not.
This article reflects the personal views of the author and not that of any firm, and should not be viewed as an investment recommendation.