While oil prices climbed and stocks plummeted during the day on Thursday, wealth-management companies approached their clients to share any information they could regarding what they could about the Russian incursion into Ukraine and provide options for investing in the event of a crisis.
In a letter to customers, UBS Wealth Management encouraged investors to remain relaxed and "keep an open mind," and "build an investment portfolio that is strong enough to handle the Ukraine crisis and the rising U.S. interest rates."
Scott Wren, the senior global market strategist at Wells Fargo Investment Institute, laid out the U.S. stock market slide in perspective by writing in an article this week that greater than 10% decline within the S&P 500 is not unusual that happens "every eleven months or more in the average."
Wren explained that the bank continues to favor U.S. stocks over international stocks, focusing on high-quality companies that are both mid-and large-cap.
UBS pointed to Russia's economic interests during the conflict in its note to customers. "In 2020, 36.5 percent Russian imported goods and 37.9 percent of its exports went to the European Union," UBS stated. "The significance of this trade partnership could influence a longer-term military conflict."
UBS stated that the possibility that oil prices will increase to US$125 per barrel or more over the next two quarters would slow the growth of global economies by approximately half one percentage point. "Should Russia's energy supply be affected, higher risk rates and lower global earnings estimates could cause more lasting losses for the equity markets," the firm said.
The most significant danger for investors during geopolitical crises is "overreacting and not diversifying."
In particular, the bank advised that investors should maintain a diversified portfolio "across sectors, regions and asset classes." they must "use commodity prices as a geopolitical hedge" in addition to "position to take advantage of U.S. dollars' strength."
The global economy is expected to continue to be strong, which will benefit value stocks and sectors that are cyclical, "including energy, financials and that of the Eurozone," the firm also stated. Investors must also strengthen their portfolios with defensive investments in areas such as health care across the globe and dividend-paying stocks.
In a video conference with clients, The firm's investment strategists provided a more complicated economic situation and the key factors investors need to consider. The wealth manager's chief investment officer, Mark Haefele stated that markets tend to recover within three months of any significant geopolitical incident regardless of whether oil is involved.
Mark Andersen, co-head of global asset allocation at UBS He, said that the past suggests that a geopolitical situation can be an excellent time to purchase risky assets like stocks, but using a more diverse strategy.
The situation, he noted, "is not a situation that could sabotage the growth of the economy," Andersen said.
According to the economist, one possibility that could arise due to the quick response to the crisis Thursday could result from selling off of currencies "that may not be justifiable" since commodity prices soared.
In terms of currency, UBS favors the U.S. dollar and other currencies that are considered safe havens, including the Japanese yen. In its managed portfolios for clients, UBS is currently buying the yen and shorting Euros (betting they'll fall), Andersen said.
In the end, UBS' long-term investing suggestions take into consideration the fact that global markets and economies can be disrupted in the same way as they are in the present; however, this doesn't mean that the expected returns over the long run will be affected in any significant way the banker said.
"Leaving risk assets in the center of a crisis is usually not the best approach to achieving long-term goals," Andersen said.
During the conference, Paul Donovan, chief economist at UBS, said that sanctions by the west on Russia as a response to the aggression against Ukraine would have a "relatively small" influence on the world economy. This is because Russia's economy accounts for only 3% of the global production, and that's approximately half of California's production, Donovan said.
"This isn't very important in an overall macroeconomic growth perspective," Donovan said.
The price of oil is rising and could be significant, particularly for consumers of oil in the western world. West Texas Intermediate crude oil increased to US$100 per barrel earlier in the day as a reaction to the war and the risk of disruptions in the supply of oil.
The main issue is what central banks' reaction to these rising prices, which indicate future inflation; however, in the end, it could slow economic activity, Donovan stated.
He isn't sure that central banks will respond immediately. However, he stated, "if we see a wage-price spiral forming, central banks could decide to take actions on the inflation side and reduce growth" to stop the spiral.
The central bank is expected to increase rates in March, as predicted. However, this shouldn't be a cause for worry. Haefele said that UBS, although it cannot predict how many rate increases the U.S. Federal Reserve is likely to undergo.
"One 25 basis point increase isn't going to impact the U.S. economy in the near-term," Haefele said.
The current crisis points to the need for nations to find renewable energy sources for energy security so as it is to stop the effects of climate change, he added.
"We've been the first and most fervent advocates of green energy, and in the switch that must be made," Haefele said. "This crisis only proves that green energy for a country ensures the security of energy. It becomes more vital each day."
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