Rally in key commodities combined with rand sell-off shields local equity market from the worst as invasion shakes global markets, writes Kelin Pottier of 10X Investments.
On Thursday 24 February 2022, Russia invaded Ukraine by land, sea and air as Russian president Vladimir Putin tries to prevent Ukraine from joining the North Atlantic Treaty Organization (Nato). Putin is also trying to force Nato to reverse its eastward expansion by removing forces and military infrastructure from member states and effectively returning to 1997 boundaries.
Since the invasion, Ukrainian troops have been fighting to keep major cities out of the hands of invading military forces, although Russia claimed early to have neutralised Ukraine’s air defences. Just a few days into the crisis, Putin sent a chill around the world when he ordered Russia’s nuclear forces to be placed on high alert.
The US, the EU and other allies responded by imposing harsh sanctions on Russia, including closing US and EU airspace to Russian aircraft, freezing the Russian central bank’s access to international reserves and cutting off Russia’s largest banks from the Swift global financial payment system. Such sanctions are an attempt to cripple Russia’s financial system, destabilise its currency and cut off access to hard currency (US dollars, euro and British pounds), thereby limiting Russia’s ability to fund warfare.
The Russian Ruble has fallen by 30% against the US dollar. In an effort to stabilise the collapsing currency, the Russian central bank has more than doubled its key interest rate from 9.5% to 20%.
Russia is of particular importance to the global economy as the world’s third largest producer of oil and gas. The Brent crude oil price has risen above $100 per barrel as fears of supply shortages mount.
Also, Russia accounts for 40% of the world’s production of palladium, a key input in catalytic converters used to reduce CO2 emissions in internal combustion engines in cars. As the crisis gained momentum, the price of palladium hit a 6-month high before retracing some gains.
In response to rising risks and tensions, global markets turned risk-off in the week ended 28 February 2022. In times of risk-off sentiment investors reduce their risk exposure in equities and emerging markets and flee to dollars, US bonds and gold as safe-haven assets to protect their capital.
Developed market equities gained marginally in dollar terms, and rose 1.52% in rands, given the 1.45% depreciation of the rand against the dollar.
Whilst emerging market equities have fallen -2.56% in rands on the back of risk-off sentiment, SA equities gained 1.45%.
As a major exporter of gold and platinum group metals (PGMs) including palladium, South African equities have been shielded as the rally in these key commodities combined with the sell-off of the rand has boosted our local resource counters, such as heavyweights Sibanye-Stillwater, Sasol, BHP Group, Harmony, Impala Platinum and Anglo American.
The table below summarises the performance of 10X’s investment portfolios as at market close on 28 February 2022:
Although all portfolios have been impacted by global events in the week gone by, we continue to be encouraged by the resilient one-year returns our funds have generated for investors.
Looking ahead, one can expect heightened volatility to continue as the situation evolves and markets recalibrate expectations. We caution investors against reacting to short-term market movements and continue to encourage clients to remain calm and to stay focused on the factors that are within their control.
Factors within an investor’s control:
Diversification: Multi-asset index portfolios that are diversified across asset classes and geographies and within asset classes safeguard investor’s money from undue risk. Diversification limits the risk of losing capital when a negative event impacts an industry or a particular region, as this latest crisis has.
Time drives risk: Investors should match their portfolios to their investment time horizon. High growth portfolios with a higher allocation to growth assets (equity and property) are better suited to long-term investment horizons. These portfolios will generate higher returns over longer periods. They will, however, experience greater variability of returns over shorter time periods.
Defensive portfolios, ie those with a higher allocation to bonds and cash, exhibit lower risk of capital loss over shorter periods and are, therefore, better suited to short-term investment horizons.
Remain invested for the long-term: Whilst the value of investments may rise and fall over the short term, the real benefits of compound growth are realised over the long term. Investors are encouraged not to sell out of investments when prices fall and thereby lock in those capital losses. Overall, success is based on time in the market rather than timing the market.
Kelin Pottier is Product Development Specialist at 10X Investments
The content herein is provided as general information. It is not intended as nor does it constitute financial, tax, legal, investment, or other advice. 10X Investments is an authorised FSP (number 28250). 10X Index Fund Managers (RF) (Pty) Ltd is a Manager registered under the Collective Investment Schemes Control Act, 2002.