Russia makes up 3.1% of the global economy and is important for two factors: its energy supplies, and the fact that it is a nuclear power. The latter of these is clearly concerning, however, we have to believe that the use of such weapons would be an act of desperation; President Putin has created the current situation strategically and tactically with a very clear outcome in mind. It would be truly unexpected, therefore, for this crisis to escalate into a war between nuclear powers.

Energy supplies are an important factor as global demand for energy is rising strongly post the pandemic, and it is therefore no coincidence that Russia has chosen now to flex its muscles. The human pain and suffering that will be caused by Russia’s actions cannot be underestimated, but as custodians of our clients’ assets we must remain calm, focused and assess the world that lies ahead both for new or escalating risks and emerging opportunities.

So, markets will remain volatile but what does this mean for our core outlook and approach?

At Tacit, our approach has always been to hold stabilisers that appreciate in value during periods such as now. Even with government bond yields being very low it is reassuring to see that this relationship is holding steady with our chosen Stabilisers rising materially to offset the volatility in equities. Predicting the timing of events such as this is extremely difficult and attempting to finesse the timing of adding defensive assets would lead to investors losing out in years like 2021 as uncertainties are always around when investing.

Our outlook remains that the global economy will continue to recover from COVID in spite of the many risks and uncertainties that we know of and some that have not yet emerged on the investment horizon. The key is to hold assets in the growth component of our portfolios that are not reliant on any one geographic market, currency block or narrow economic outcome, and which have strong balance sheets to weather periods such as now.

We see this as a very different environment to that which we wrote about extensively in 2020. The COVID outbreak was a binary event for capital markets and therefore we remained cautious for a prolonged period until vaccine efficacy was proven. The current tensions in Ukraine will have an impact on energy prices, which in turn will lead to higher short-term inflation numbers, but will also result in lower demand, which is actually our core outlook. Higher government debt levels, higher tax rates, and now weaker demand with increased commodity prices are a challenging environment, but not unusual based on the history of the past decade.

Growth, all be it at lower absolute levels, is one of the main reasons that our strategies remain heavily allocated towards companies that can grow their cash flows above the prevailing rate of economic growth on a multi-year basis without the need for very strong economic growth numbers. These companies have been affected in the short term by expectations of rising interest rates to offset a strong global economic upswing. Even before the present focus on Ukraine and Russia captured the headlines, investment markets had been fretting over rising interest rates to cool a strong global economic upswing. In equity markets, this precipitated a rotation away from companies that might be considered dull but steady in favour of businesses which were perceived to have strong pricing capacity where consumer demand continued to fuel the economic emergence from Covid restraint. We fully expect this to reverse once the panic over the Ukraine conflict abates and investors begin to focus back on which companies can deliver in a low growth world.

Our strategies have increased exposure to holdings such as Prusik Asian Equity Income, Guinness Global Equity Income and BNY Mellon Global Equity Income over the past few months as, in our opinion, these provide very strong risk reward characteristics, trading at low valuations even before the recent falls. Alongside these holdings, longstanding exposures such as Loomis Sayles US Equity Leaders provide exposure to a basket of companies that have historically and will continue to exhibit very strong cash flow growth and profitability in a low growth world. We will be reassessing the weightings towards these different types of exposures following the current volatility but do not envisage changing the holdings in our strategies as each has a unique opportunity profile which we believe clients will benefit from over the coming years.

The Growth/Stabiliser mix and our conviction in the equities that we have exposure to actually makes us very positive on a medium-term view albeit with short term events which we cannot predict. Remembering each investor’s objectives is vital as always during times such as now.