Russia - Ukraine conflict and interest rates in the spotlight

Financial markets have been volatile since the start of the year, and investors may have noticed falls in the value of their investments. Markets began the year on the back foot, with investors worrying about the possibility of higher interest rates to combat a jump in inflation.

More recently, geopolitics has taken centre stage, as tensions between Russia and Ukraine have escalated. Events took a sombre turn last week as hopes of a diplomatic resolution waned, culminating in Russia’s invasion of Ukraine.

This crisis continues to unfold, and it’s hard to draw any firm conclusions on how things may play out. There is major concern around the humanitarian impact of this conflict, and sadly the prospects for de-escalation have faded.

Taking a step back, there are other significant global implications, especially on global growth and trade. Investors don’t like uncertainty, so Russia’s invasion of Ukraine raises a number of concerns and explains why financial markets have been up and down of late.

The US, UK and the European Union have worked quickly to place sanctions on Russia, in an attempt to make things ‘economically difficult’ for the Russian regime. However, Russia is a key exporter of oil, gas and other commodities, and broad-based sanctions have the potential to impact supply chains, which could worsen inflationary pressures.

It has certainly been a tough start to the year for investors, with both equities and bonds underperforming. Since 31 December 2021, the key US share market is down around 8%. New Zealand shares are also lower, having fallen by around 10%.

Bond markets have also struggled. These tend to underperform when interest rates are rising. Signs of more persistent inflation in many of the world’s major economies suggest that interest rates will need to rise to bring this back under control.

Although share markets fell sharply on news of Russia’s invasion of Ukraine, they have since recovered some of their losses, with the US market finishing last week higher. Some investors saw the initial falls as a buying opportunity, looking to pick up high-quality companies at lower prices.

Markets also appeared to take some comfort from signs the conflict was unlikely to move beyond Ukraine’s borders, and have reacted positively to the targeted response of Ukraine’s Western allies (the US, UK and European Union), which has focused on Russia’s banking system.

However, commodity prices headed sharply higher, with the price of crude oil rising above the US$100 a barrel level at one point, before falling back.

The situation in Ukraine is evolving and things are changing quickly, so you should expect there to be ongoing volatility in financial markets. Interest rates will remain a focus for investors and, at the moment, it’s hard to know if the geopolitical situation will impact the timing and pace of future interest rate hikes from the world’s central banks.

Most of ANZ Investments’ funds are carefully diversified to help manage this volatility. For example, they hold a combination of shares, bonds and other investments such as property and infrastructure. This provides a cushioning effect should an asset class fall in value, with the aim of allowing your investment to ride out any ups and downs in financial markets.

It’s also worth remembering that fund returns were strong in 2021, and indeed have been for the last ten years.

The US share market is still more than 20% higher than before the COVID-19 pandemic, and while bond markets have fallen in value more recently, they have delivered positive and consistent returns to investors over recent years.

Nevertheless, we know that watching your investments fall in value can be unnerving, so we urge investors to remain focussed on the long term and try to avoid making knee-jerk or short-term decisions. People investing in KiwiSaver or other investment funds should focus on their own situation, including their tolerance for risk and their long-term financial goals.

If you’re still concerned, see our Managing market volatility article  for tips on how to deal with the ups and downs in markets and find out some of the ways ANZ Investments is looking out for your investments.