THE the war raging in Ukraine is rapidly turning into a humanitarian disaster and now poses a real threat to the country’s continued independence. Our thoughts are with Ukrainians around the world, as are our hopes for a quick exit from this crisis.
Addressing our own financial challenges and opportunities in the current climate may seem oddly at odds with the tragedy of events unfolding in Ukraine. But it is something we have to do, however unpleasant the geopolitical context may be.
Investing for the long term requires us to be alert to the many risks we will see along the way, while keeping a constant view of our long-term goals regardless of the events placed in our path.
To avoid our investments coinciding with what we might see as a favorable period ahead – an approach fraught with its own dangers – diversification remains the best way to help move our portfolios forward towards when we need it to finance the events of our life.
Diversification was the watchword this week, as Fidelity Personal Investing recorded the latest trends among fund buyers, chief investment officer Tom Stevenson revisited his fund picks for 2022 to see if anything had changed, and Fears about the effects of the war in Ukraine on world food prices have come to the fore.
Funds bought by investors in February
Fund buying at Fidelity Personal Investing last month suggests that investors are increasingly approaching the current environment based on two distinct premises.
The first is that inflation and uncertainty are here to stay, requiring a more diversified approach to portfolio construction. The Ninety One Global Gold Fund entered the top 10 best-selling funds at Fidelity Personal Investing for ISAs and SIPPs, while the BlackRock Natural Resources Growth & Income Fund also made a new appearance.
Investors entered the Ukraine crisis already preoccupied with inflation, and the latest developments will likely only make matters worse.
With commodity prices rising by leaps and bounds (more on that later), it makes sense to have exposure to beneficiaries. Gold has the added benefit of having a long track record of maintaining its value through geopolitical shocks.
At the other end of the spectrum, funds with significant weightings in the technology sector remained popular, including the Rathbone Global Opportunities Fund and the Fidelity Global Special Situations Fund.
The purchases of these funds and others with large positions in tech companies come after respected tech investor and Ark Invest founder Cathie Wood was quoted as saying in late January “innovation is on sale”.1.
Clearly, a significant number of investors see the downward adjustment in tech stock prices since late last year as an opportunity for accumulation.
Fidelity Chief Investment Officer Tom Stevenson discusses his fund picks for 2022
In light of developments in Ukraine, which have clouded investment sentiment, Tom Stevenson reviewed his fund picks for 2022 this week. He found that nothing had fundamentally changed. Accordingly, his choices remain: Fidelity Global Special Situations Fund; Ninety One Global Gold Fund; Artemis UK Select Fund; and the Japanese fund Baillie Gifford.
In Tom’s view, these funds are well positioned to capitalize on three themes that are likely to persist in the coming year, namely: stocks are still the preferred place over bonds (Fidelity Global Special Situations) ; inflation fears set to persist (Ninety One Global Gold); the leadership of the American stock market would be challenged this year by less well-rated markets (Artemis UK Select, Baillie Gifford Japanese).
How Ukraine will affect food prices
Increased food insecurity and rising food prices are problems born out of the Covid-19 pandemic. According to the World Bank, the pandemic has reversed gains in global poverty reduction for the first time in a generation.
Now the problem looks set to get worse. Russia and Ukraine are the world’s largest and fourth largest wheat exporters. They are also major exporters of other cereals and important suppliers of sunflower seeds and vegetable oils.2.
As Fidelity’s Ed Monk pointed out this week, the war could impact the production and distribution of these vital commodities. Next season’s crops could also be affected if the region’s fertilizer production is disrupted.
This is bad news for the world’s leading producers of consumer goods such as Nestlé, Procter & Gamble and Unilever, as they will only be forced to bear even higher input costs in the hope of being able to pass them on to consumers.
This is also obviously bad news for consumer discretionary companies, as consumers themselves will have to spend a greater proportion of their income on household staples.
Defense stocks – should we pay more attention?
As expected, the shares related to defense and cybersecurity in the world have increased since the beginning of the conflict in Ukraine. In the UK, BAE Systems and government defense technology company QinetiQ are among those who have seen their share prices rise3.
Germany’s decision last week to increase overall defense spending to 2% of gross domestic product from 1.5% in 2021 also boosted the sector. Germany is now on track to spend over 100 billion euros on defense this year alone4.
The British Darktrace, a specialist in cybersecurity which uses artificial intelligence, also caught the attention of investors. On Thursday, the company announced strong increases to its December 31 interim revenue and profit and significantly improved its 2022 revenue forecast.5.
Despite recent spikes in defense stock prices, it’s important to remember that each will eventually come under closer scrutiny on its individual merits in more peaceful times. The recent increased attention will certainly have helped shine a light on undervalued defense contractors and suppliers, as well as planned increases in US military budgets.
Stocks are always the best place
Interest rates may go up, but they probably won’t go up much from history. Following its policy-setting meeting early last month, the Bank of England noted that markets expect UK interest rates to rise just 1.5% by the middle of 2023.6.
In this case, and in an environment where inflation exceeds 5%, the returns we are likely to see on cash deposits over the next year will not be enough to be attractive to investors. In contrast, equities can still be expected to generate competitive total returns (capital growth plus income) over time, even though higher interest rates will reduce the underlying profitability of some companies.
It is undoubtedly riskier to invest in stocks than in cash or bonds, but neither of these last two asset classes can offer investors anti-inflationary returns (with the notable exception of indexed bonds ). Staying the course with stocks continues to make sense.
1 FT, 26.01.22
2 Agricultural Market Information System, 25.02.22
3 Bloomberg, 03.03.22
4 Reuters, 27.02.22
5 Darktrace, 03.03.22
6 Bank of England, 03.02.22