From the archive. First published on 26 February 2022 on weprivate.com.au. It reflects markets, rules and our views at that time and has not been updated. Some client-specific portfolio notes in the original have been removed.

Shares fell sharply around the world after Russia’s attack on Ukraine. Risk assets sold off by around 3%, and most share markets are now 10 to 15% below their recent peaks. Traditional safe havens such as the US dollar and government bonds have rallied. Substantial sanctions on Russia from Europe, the US, Australia and others are certain to follow, and the consequences of a long conflict are still largely unknown.

The timing is unfortunate. The global economy was showing strong signs of returning to sustainable growth, but it is also grappling with post-pandemic inflation, now the highest in 40 years. Central banks are trying to move from emergency-low interest rates to more normal settings while shrinking their balance sheets.

Why it matters beyond the region

Russia’s economy is about the size of Australia’s and Ukraine’s is far smaller, but both matter for energy and food. Western Europe imports around 30 to 40% of its oil and gas from the region, and both countries are major grain exporters. Energy and grain prices have already soared.

Higher energy and food prices add to inflation and act as a tax on consumers. With interest rates expected to rise, markets have sold off on fears that prolonged uncertainty could slow the post-pandemic recovery. Markets hate uncertainty.

Valuations

Many markets were already expensive. Even after the recent fall, the US S&P 500 trades on a forward price-to-earnings ratio of 18.5 times, against an average of 16.1. Australia looks better value at 15.5 times, one point above its long-term average, and its high dividend yield stands out against 10-year bond yields.

Keep a cool head

Looking through the short term, there is reason to stay relaxed and confident about the longer term. Markets often respond to events like this with alarm, then recover within a few months.

The best advice in a crisis is to keep a cool head, revisit your investment objectives, and make sure your asset allocation is still right for you.

General information only. It does not take into account your objectives, financial situation or needs. Past performance is not a reliable indicator of future performance.