Implications of the Russian Invasion

On 18th February news broke that President Biden was expecting Russia to invade Ukraine “within
days” and it was asserted that Russia had begun “false flag” attacks as a pretext for the invasion.
Tragically the situation has escalated to a full scale invasion.
The importance of the geographical diversification within our portfolios has once again been
highlighted. Naturally we have seen widespread volatility in global equity markets between 18th
February and the latest available data at the time of writing on 1st March. It is clear that proximity to
the conflict and the degree of dependence on Russian energy exports have been a major influence
on short term broad market index performance. All data quoted is on a total return basis and in
Sterling terms.
Between 18/02/2022 and 01/03/2022, the FTSE 100 has lost -2.18% and the FTSE Developed Europe ex
UK Index has lost -4.54%. Germany currently receives 65% of its natural gas supply from Russia,
whilst the European Union overall receives 40% of natural gas supplies and 25% of crude oil from
Russia. By contrast the UK only receives between 4 and 7% of its natural gas supply from Russia.
Conversely the S&P 500 and the Nikkei 225 are in modestly positive territory in the same time period
at 0.76% and 0.99% respectively. The US market has weathered the storm fairly well because the US
has oil and gas supplies which become economically viable to exploit at higher prices. The MSCI
World index has been close to flat in this time period with a very modest decline of -0.01%, whilst the
MSCI Emerging Markets Index has fallen -2.82%. Russia only accounts for 3.2% of the MSCI Emerging
Markets Index and 0.3% of the MSCI World index. It is probable that MSCI will remove Russia from
their indices in the near future.
Naturally Russian shares have been hit hard by renewed sanctions and action to cut Russia off from
the SWIFT banking system. In fact the Russian stock market has been closed since 28th February. It is
important to reassure you that there is no direct exposure to Ukraine within the MFDM model
portfolios and there is very limited direct exposure to Russian equities as detailed in the table below.
So far there have been no major systemic or liquidity problems for the global financial system due to
Russia’s expulsion from SWIFT and we continue to monitor the situation.

WEIGHTED EXPOSURE TO RUSSIA WITHIN THE MFDM MODEL PORTFOLIOS
CAUTIOUS: 0.23%
CAUTIOUS TO BALANCED: 0.22%
BALANCED: 0.22%
BALANCED TO ADVENTUROUS: 0.32%
ADVENTUROUS: 0.23%

Prior to Russia invading Ukraine we had already agreed some changes to the fund selections in our
model portfolios and executed them for MFDM clients.

The bond fund changes within the Cautious and Cautious-to-Balanced portfolios were
specifically made with the possibility of further inflation and rising interest rates in mind, which
has become even more important in terms of positioning since the Russian invasion of Ukraine.
The switches were to more flexible fixed interest fund choices which can invest in all types of
bonds and which have a lower duration, a measure of the interest rate sensitivity.

The equity switches within portfolios were to ensure that the model portfolios have exposure to a
range of investment strategies and have an allocation to areas such as financials and energy,
which have the potential to be positively influenced by rising interest rates and commodity
prices respectively. Whilst there could be some short term volatility for energy companies, for
example, BP stock dropped on news of the forced sale of its holding in Russia, we remain positive
about energy companies based on economic re-opening following the pandemic. It was also
noted on a recent call we had with a fund manager that higher oil and gas prices will increase
the value of other production sites which BP holds and this should offset the loss of Rosneft. The
larger energy companies are also expected to be involved in longer-term energy transition
away from fossil fuels, which we view as an opportunity

Janus Henderson have compiled data from JP Morgan and Bloomberg which looks at the impact on
the S&P 500 of localised military conflicts from 1948 onwards. The data reveal the index has been
positive again 67% of the time 1 month after the conflict started and 78% of the time after 3 months.
Obviously we cannot guarantee that the impact of the conflict in Ukraine will be short term.
However, we believe it is crucial to remain invested even when equity markets are volatile.
Remaining invested over a long time period has historically produced better returns than
attempting to time the market, which carries the risk of missing out on market performance.
Research indicates that good and bad trading days are often clustered together and we have
already seen elements of this in the recent volatility with the FTSE 100 dropping -3.63% on 24th
February and recovering 3.91% on the 25th. It is also important to keep in mind that Russia and
Ukraine will not be the only story which drives markets in 2022. There are still reasons to be positive
as vaccination rates improve and the world recovers from the lockdowns and dislocations caused
by the pandemic. Naturally the situation remains very fluid and we will be monitoring news and
markets closely.

This article is for information purposes only. It does not constitute advice and is not a
recommendation to invest. The value of investments may go down as well as up and you may
not get back your original investment. Past performance is not a guide to the future.

The information in this article is correct as at 1 March 2022

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