How to invest during the war in Ukraine
The Russian invasion is just the latest in a trio of risks that has rattled stocks already in 2022: the unfolding Russia-Ukraine conflict, inflation hitting four-decade highs, and impending interest rate hikes from central banks.
Coming as it does at the tail end of the Covid-19 pandemic which also damaged the world economy, the Russian invasion will have economic effects that are substantial but hard to predict.
Below, we have brought together some of the key themes that investors will need to consider as they work out how to adjust their investment strategy to reflect the unfolding tragedy.
Consider carefully if you want to rush to dump your stocks. Over the last century, most military crises have been accompanied by rising stock markets, or at the very least, stable markets. The reason is that wars usually result in a surge in demand and expenditure, which translates into increased profitability for businesses.
Of 30 crises and wars that have affected the Australian share market since 1939, markets reacted negatively at the outset in 22 cases but on almost all of these occasions the sell-off lasted only a few days.
Within three months, most stock markets were back above pre-crisis levels, and virtually all were ahead after a year.
Other variables at work, such as the GFC, the 'tech disaster,' or economic recessions unconnected to the conflicts, accounted for the rare cases where share markets were not ahead 12 months later.
The lesson here is to be careful about dumping stocks in response to bad news about war because a stock market meltdown is far from certain.
War has always been a solid predictor of inflation, from the Russian Revolution to Vietnam. As Russia's invasion of Ukraine shifts the balance of global political and economic pressures towards higher inflation, history may be poised to repeat itself.
For three reasons, inflation is fueled by war. First, combining military and civilian demands puts pressure on the economy's production capability, particularly when factories and transport networks have been damaged by bombs.
Second, supply networks are disrupted by embargoes, sanctions, and war. Sanctions further choke off already strained supply systems.
Finally, governments frequently fund wars by printing money or keeping interest rates artificially low. So, whether the initial price spike triggered by Russia's attack lasts will depend upon whether the Federal Reserve and other central banks use the right tools and incentives to bring inflation back down.
Inflation in the United States had reached a 40-year high even before the invasion and interest rates are rising.
The invasion of Ukraine by Russia has destroyed any hopes that American consumers had for relief from skyrocketing inflation, with the cost of other items such as food certain to rise as well.
That means that investors should be considering inflation-friendly investments for the time being.
One sector that is worthy of particular examination during the current crisis is energy, because of the sharp increase in oil prices and sanctions on Russian gas.
The conflict in Ukraine has exacerbated a natural gas scarcity that has already pushed up inflation in the European Union. Gas prices are also at record-highs in the United States.
The union is now considering a massive and expensive redesign of its whole energy grid to completely exclude Russian natural gas.
Residential Mortgage-Backed Securities (RMBS) are bonds that derive revenue from Australian homeowners' mortgage repayments.
Some of Australia's top lenders, including Westpac, National Australia Bank, and Suncorp, have issued these RMBS bonds, which are normally accessible only by institutional investors.
RMBS are 'floating rate,' which means they get a set interest margin above the floating bank bill rate. This means that if cash rates begin to climb in response to inflation, RMBS investment coupon yields will rise as well. RMBS distribution returns benefit from rising interest rates.
Firstmac is a prominent issuer of RMBS bonds, and it also provides the High Livez RMBS investment fund, which aims to provide regular income, and enables regular investors access to an asset class that is often only available to institutional investors.
As with any financial commitment, it is a good idea to get independent financial advice before making an investment.
To learn more about High Livez, click here.
Australia's natural resources
Whatever the outcome of this latest invasion, military build-ups and hostilities (including in the United States, China, Japan, Korea, Taiwan) are driving up commodity demand and prices, which benefits Australia's commodity exports while also adding to global inflationary pressures.
As horrible as it is to contemplate, there is a small but real chance that the war in Ukraine could result in nuclear weapons being used. Russia has more than 4000 nuclear missiles of various sizes, and more than 6000 nuclear warheads.
Some research firms have estimated that there is an "uncomfortably high" 10% possibility of "civilization-ending nuclear war."
Despite the dismal forecast, analysts point out that there is a "large" margin of error in the prediction, basically admitting that it is impossible to predict what will happen.
However, it is generally agreed that despite the anxiety it provokes, investors should dismiss the prospect of nuclear devastation when considering their market exposure since, if that worst-case scenario occurs, stock losses would be irrelevant.