Russia's invasion of Ukraine brings with it first and foremost a tragic humanitarian cost. Hundreds of thousands of refugees have fled, homes have been destroyed and lives are being lost. It also clearly has significant economic, geopolitical and investment implications.
Even before tensions escalated, a stock market slide had continued into a second month with investors shunning riskier assets in favour of safer areas and protection from inflation. That only gathered momentum as full-scale conflict broke out. The prices of oil and gas, already buoyant from a tight market, rose further. The price of a barrel of brent crude broke through $100, a level last seen in 2014. This stoked more fears of inflation and bonds, normally something of a safe haven in times of crisis, failed to provide much shelter.
Russia is a powerful player in the energy market and there are concerns that it will continue to use gas supplies as a weapon against sanctions. Europe is highly reliant on Russian gas, and any disruption of energy supplies could boost energy prices further in the continent and elsewhere. Sanctions are also likely to impact international trade and payments to and from Russia for an indeterminate period as Moscow is now all but cut off from the mainstream global financial system.
Unsurprisingly, funds with significant direct exposure to Russia and the adjacent markets of Eastern Europe were the worst performing over the month. The most directly affected funds are currently suspended from dealing as Russian shares cannot be sold in its domestic market by overseas investors. Shares in London-listed Russian entities have also plunged. Other businesses with substantial Russian assets, notably BP which has decided to get rid of its near-20% stake in Rosneft, have also experienced declines.
A few funds did perform well during the month, notably commodities and natural resources were resilient as energy and precious metals prices continued to climb. Gold in particular was in demand as both a crisis asset and an inflation hedge. Gold mining stocks (outside of Russian assets) rose quite sharply in response, and the handful of funds specialising in this niche and high risk area dominate the top ten top funds over the month.
The other islands of positive performance were found in Latin American equities, which recovered a bit more after starting the year well, with oil and metals prices buoying natural resource laden economies. North America and Asia also fared well in relative terms, albeit it was a mixed picture. India continued to give back more of last year’s strong performance while Japanese equities held up better.
As for the outlook from here in economic terms, the escalation of the crisis is likely to be inflationary because resources are in shorter supply and higher energy prices are set to drive up the cost of transport. Both Ukraine and Russia are leading grain exporters, and Russia is a major supplier of many metals. In addition, Germany’s suspension of the construction of the Nord Stream 2 pipeline supplying natural gas from Russia to Western Europe, along with sanctions of Russian oil exports, is likely to result in higher prices.
Higher energy and commodity costs are likely to feed into other areas of the economy, exacerbating the cost-of-living crisis already underway. Central Banks will therefore have a dilemma. Try and control price inflation through tighter policy, or do so at a much slower pace in the hope of avoiding recession. As such, we expect Central bank activity to dominate markets over the next 12 months as they make their position clearer.
As with any fast moving situation, it’s important to keep a clear head and not make changes to your investments in haste. There’s more on how to deal with market volatility in my article on the subject.
Although investors should be aware past performance is not a reliable indicator of future results, here are the top and bottom ten Investment Association (IA) funds and sectors* for February 2022 in full:
Top 10 funds:
Bottom 10 funds:
Top 10 sectors:
Bottom 10 sectors:
Past performance is not a reliable indicator of future returns. Figures are shown on a % total return basis, bid to bid price with net income reinvested; Source: FE Analytics, data for February 2022: 31/01/2021 to 28/02/2021. Onshore and retail open-ended funds only.
*There are several thousand funds on sale in the UK. The Investment Association divides these into over 40 ‘sectors’, broad groupings that help investors and advisers compare funds of similar types before looking in detail at individual funds.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
February’s top and bottom performing funds
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