With the world gradually starting to recover from the devastating impact of the COVID-19 pandemic, the recent invasion of Ukraine by Russian forces has once again rattled global stock markets. The repercussions of this conflict are likely to be felt around the world for some time, and many South African investors are understandably concerned about how it will affect their portfolios.

Jason Liddle, Head of Distribution at Sanlam Investments says that it is more important than ever to stay calm and focused on one’s long-term investment strategy. “To help investors make the right decisions in the current volatile environment, we have asked our team of investment professionals to provide some insight.”

The global economic impact

To start, Chief Investment Economist at Sanlam Investments, Arthur Kamp states that although the negative economic impact will be skewed towards Russia, countries that trade or have financial connections with Russia, will also be impacted. “Global gross domestic product (GDP) will likely be revised downwards due to the direct impact of this conflict. Russia accounts for 3% of global GDP, with Ukraine making up less than 0.5%. The broader restriction of trade due to the financial sanctions being imposed are also a consideration. Russian imports and exports of goods and services account for 50% of its GDP, with exports being heavily skewed towards energy products and metals.”

He predicts that if the conflict is contained to Russia and Ukraine, four outcomes are likely to emerge during the course of the crisis. “Firstly, commodity exporting countries like South Africa may benefit, should commodity prices be supported if these supply chains are disrupted. Oil exporters will also benefit but the spike in oil prices will significantly negatively impact global real GDP. Russia is expected to go into recession, which means that exporters to the country (like China, Germany, Belarus, the USA and Italy) will be impacted. Lastly, while the global economic expansion is expected to continue, it will be at a significantly slower pace while inflation remains a concern.”

Emerging markets are ahead of the curve

Feroz Basa, Head of Global Emerging Markets at Sanlam Investments, says that higher oil prices will place pressure on already stretched consumers with the potential risk of stagflation. “This will have a negative effect on markets. However, if the situation is solved fairly quickly, oil and commodity prices will normalise, and the focus will return to higher inflation and market valuations.”

He points out that, with the exception of Russia, emerging markets are in much better shape than during previous crises. “In fact, emerging markets are well ahead of the curve in terms of normalising interest rates relative to developed markets. Their valuations are also more attractive.”

According to Basa, Sanlam’s Global Fund’s exposure to Russia is limited to 4.5% of the portfolio. “This means that the sell-off will negatively impact it in the short term. However, most of our Russian exposure is in food retailers. These are more defensive in nature and should recover after the market’s knee-jerk reaction. The portfolio is well-diversified, and our team actively monitors its Russian exposure. Currently, they are comfortable with the portfolio’s exposure in terms of Russian stocks.”

The impact on fixed income funds

Mokgatla Madisha, Head of Fixed Interest at Sanlam Investments, says that there has been an increase in volatility in the bond markets. “Bonds have lost most of the gains they have made this year to date. It comes as no surprise that the negative sentiment in the market has increased as a result of the recent SA National Budget (which was not as positive as expected) as well as the current conflict in Ukraine.”

As a result, he explains that Sanlam’s team has been reducing the duration of its portfolios in expectation of the increased inflationary risk from oil prices. “While inflation seems to be peaking, the disinflationary cycle is anticipated to be slower than initially expected.”

The current positioning in Madisha’s portfolio is mainly informed by the relative outperformance of South African assets, rather than the Russian-Ukraine crisis. “Bonds are looking more attractive due to yields selling off from their relatively expensive levels in mid-February. Meanwhile, South Africa is experiencing improving terms of trade – even as oil prices increase – which provides structural support to the ZAR.”

Cooler heads prevail for equity portfolios

Andrew Kingston, Co-Head of Equities at Sanlam Investments notes that Sanlam’s equity portfolios have large overweight positions in local resource companies listed on the Johannesburg Stock Exchange (JSE).

“The current situation supports this view, as long as global GDP growth does not slow down significantly. Our equities team expects markets to remain fragile but for the South African market to be resilient. It is important for investors to stay calm, despite the devastation unfolding right now.”

He adds that many case studies have shown how wealth can quickly be eroded when clients make hasty changes or exit the market in volatile periods. “Market volatility is nothing new. However, time and again, history has shown that markets do recover – sometimes quite rapidly.”

Multi-Asset – Absolute Return portfolios

Portfolio Manager at Sanlam Investments, Fernando Durrell expects increased volatility in the markets from riskier assets. “I believe that our fund is currently well-positioned due to its exposure to hard currency, rand-hedge SA equities, the use of protective structures and notable exposure to interest-bearing assets.”

He says that diversification remains key. “It is important to find the balance between protecting portfolios from negative returns and taking advantage of growth opportunities as and when they arise.”

The team remains confident that their disciplined process, strong focus on downside risk protection and modelling of various scenarios provide a solid foundation to offer their clients inflation-beating returns over the medium to long term.

“To weather this crisis and avoid unnecessary losses, it is essential to remain invested and trust your portfolio manager to ‘steer the ship’ through the storm. Now is the moment to avoid making fear-driven decisions regarding investments,” Durrell concludes.

Liddle concludes that now is the moment to avoid making fear-driven decisions regarding investments, “Sanlam Investments has a pragmatic value long-term investment philosophy. We believe in the rigour of our research process, the talent and expertise of our investment professionals, and the robust fundamentals of the companies in which we invest. We also draw heavily on investment data from other significant historical events that show that markets inevitably correct themselves. We remain steadfast in our views and our strategy.”

ENDS