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Tanks and troops roll into Ukraine – Outlook

We need to bear in mind that share markets around the world have made significant gains since the March 2020 lows. The US share market has increased by 117% while non-developed markets around the world have increased by 78%. These gains have been seen as over-exuberance, excessive borrowing and risk taking. On the back of this, inflation has kicked up seen by the US running inflation at 7.5%, the highest in 40 years. This has in turn driven up the price of fuel and particularly oil and gas.

Now we overlay the invasion of Ukraine either part or full. We all have heard that there will be significant sanctions, and more than likely gas supplies will be cut off to Europe. Remember, Germany relies on Russia for 60% of its gas supplies. This means that Australia will divert shipments of LNG to Europe and these are shipments that we do not actually have, meaning the price of gas and oil will go up not just in Europe but also in the local Australian economy. It will also mean that the supply crisis that we are currently experiencing will be extended, and consumer prices will remain high. Just when we thought we were recovering from COVID….

Events like this create opportunities from a financial planning and wealth management perspective. When Iraq invaded Kuwait in 1990 (the most obvious comparison), markets fell 17% and took almost 6 months to recover. So the lesson from this is that markets generally recover quicker from geopolitical events. Recession risks are low given household spending is strong in the western world and the balance sheet of many companies are strong.

We may well get a fall in markets of 10-15% or possibly a mild bear market of 20% but we believe it will be short lived.

While no one has any insight into Putin’s mindset, it doesn’t really change our approach to managing portfolios. Our investment managers have been reducing risk progressively and we have been gradually reducing your positions and taking profits over the last 9 months. We are positioned now to change up if we need to.

We live in interesting times…

Have a great week.

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