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Geopolitical Tensions

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The equity markets have had a bumpy start to the year. In addition to record high inflation, concerns over Central Banks’ policy, and the Covid-19 pandemic, Russia’s invasion of Ukraine has added yet another layer of uncertainty. Year to Date, the S&P500 is down <red>-10.02%<red>, the NASDAQ is down <red>-13.88%<red>, while the TSX is down <red>-2.23%<red> [1].

Russian Invasion of Ukraine

The world watched in disbelief as Russian troops marched into Ukraine on Feb 24, 2022. Putin called this a “special military operation” through Ukraine, while the western governments called it a full-scale invasion. The western coalition is responding with force. The U.S. President promised “severe sanctions” would be imposed on Russia after the attacks, and European governments vowed to freeze Russian assets and shut Russian banks out of their financial markets [2].

Notwithstanding the geopolitical ramifications, this move sent chills down the financial markets. Investors fled for safety as they sold equity and bought top-rated government bonds and gold. Oil hit $100 a barrel for the first time since 2014. Europe’s stock markets tumbled nearly <red>-4%<red> in frenzied selling and Wall Street opened down <red>-2.5%<red> on the morning of the news. However, the U.S market eventually bounced back and closed the day higher [1]. The Russian and Ukrainian financial markets saw the greatest turmoil. The Russian ruble weakened nearly <red>-7%<red> vs. the dollar, and the Moscow stock exchange saw record falls of more than <red>-40%<red> [1]. Ukraine was forced to suspend trading in its currency, while its bonds crashed violently as investors feared default as it did after Russia’s 2014 annexation of Crimea.

Our Positioning & Conclusion

The current market is primarily trading on emotions. However, we believe our portfolios should hold up through this volatility. In fact, so far, our portfolios have protected well on the downside, and we have declined far less than the market. We would also like to remind our investors that we do not have any direct exposure to Russia or Ukraine. Further, we have placed in multiple hedges that should offset the impact to our portfolios. For instance, we have exposure to oil through Exxon, and the company will likely see its revenue boosted from higher oil prices. Further, we increased our exposure to the Canadian markets earlier in the year, which being an oil exporting country have fared better relative to its global peers.

Further, despite the panic gripping the financial markets, ultimately, it is the company fundamentals that determines value. Most of our underlying businesses will not be affected by this event. Apple will continue to sell iPhones, AB InBev will continue to sell beers, people will still eat fried chicken at KFC in China and use Google to search the web.

We would advise our investors to stay invested and be patient. The world has seen its share of troubles over the decades, including two World Wars, the Great Depression, 9/11 terrorist attacks, the Cold War, among countless other events. However, the financial markets keep plowing onwards and upwards. If you had invested $100 in the S&P500 in the beginning of 1920, you would have about $2,614,666.25 at the beginning of 2022, assuming you reinvested all dividends. This is a return on investment of 2,614,566.25%, or 10.48% per year [3]. We continue to believe the surest way to guarantee your fair share of returns in the market is to stay invested.

[1] FactSet February 24, 2022, Price Return – End of Trading Day