Our hearts go out to people of Ukraine and to all who have family connections and loved ones there. Kyiv is one of the oldest and largest cities in Europe (predating Moscow by 700 years) and Ukraine has been the largest country in Europe. We can scarcely imagine war again reaching this peaceful and democratic nation. It is heartbreaking to see Russian tanks entering the country, troops storming the cities, aircraft and missiles penetrating the skies. Today briefly we share some thoughts on this and our perspective for investments, pensions, and our financial future. There are vital lessons here to bear in mind today and for such future events or crises.
After the last century’s world wars we had hoped our modern world would respect national boundaries. Expansion of international trade, culture and cooperation would be the glue to reduce or eliminate wars. Peace however is fragile, and words of “freedom” have morphed into tools of deception and division. Used to be, maps of middle and eastern Europe were ever-changing as countries and confederations gained or lost land, and some were eliminated completely. Hitler thought it natural to dominate wherever his language was spoken (and then others as well). Putin sees similar destiny over Slavic areas formerly linked to Russia or the USSR. In his view, boundaries are flexible, and we can see that repeatedly in histories of Poland, Estonia, Latvia, Lithuania, Ukraine, Moldova, Romania, the Balkans and Turkey.
The Russian dictator continues his agenda today in Ukraine as he did in Crimea (2014) and Georgia (2008). What he never imagined is the valiant soul of the Ukrainian people and their president, Volodymyr Zelensky. As a result NATO has rediscovered its soul, the European community is sharpening every tool, even Germany and Japan have joined at considerable cost. China is urging peace while pondering how they may benefit at Russia’s future expense. Russian stocks have dropped by half and its currency by a third, with foreign reserves frozen and international payments nearly stopped. Next steps may be declaring and enforcing a no-fly zone over Ukraine, containing the seven Russian naval vessels in the Black Sea, and of course continuing day and night to replenish Ukraine’s arms against Putin’s war machine on land and in the air. Possibly events in Moscow may suddenly shift: it succeeded against Julius Caesar, was certainly tried on Hitler, and Putin’s generals and billionaire associates may soon feel their interests would best outlive the diminutive despot.
Recognizing as events change by the hour here’s a brief and tender vignette on the human side of two people I know. Two women sharing the same name were at church on Sunday, one born in the Ukraine and the other in Russia. They embraced, tears in their eyes, understanding the turmoil in their countries today and the immense cost to both of their families. At the human level that we all share, the mothers and families of Russia and Ukraine want peace, pray for peace, protest for peace, and carry the past weight of generations who died for peace. The enemy is in the Kremlin – afraid of increasing unrest among citizens living under his boot since 1999.
INVESTMENTS IN TIMES OF WAR.
I’ve responded to many individually in the past week and want to share with everyone some of the insights we have to offer – and if events require further update I may publish a supplement later this month.
WHAT IS THE RISK?
Various crises upset world markets and bring nervous news headlines (attracting advertising and thus more headlines). Fact is, prudent investors remain safe, and our investment mandates are designed to keep you secure and well rewarded, fitting your certified financial plans. It’s worth knowing, Russia’s economy is only 1/20th the size of the U.S., 1/15th the size of China, 1/10th the size of Europe, and for perspective even smaller (GDP) than Italy, Canada, and Ukraine. We avoid direct exposure to Russia so downside for us relates more to short term economic impact on Germany, Poland, and France. Match that with the upside. Tough times don’t last. Turmoil is brief. Russia is well excluded until Putin is gone, while this week’s events have eased interest rate assumptions for now, thus re-valuing the trend for bonds and equities somewhat higher.
While current events vary from historic averages, look at the past:
- Attack on Pearl Harbour, – 8%; month later +2%; year later +16%.
- Outbreak of Korea War, -12%; month later +10%; year later +42%.
- Cuban Missile Crisis, -10%, month later +16%; year later +41%.
- USSR in Afghanistan, -2%, month later +10%; year later +37%.
- Gulf War Ultimatum, -4%, month later +17%; year later +37%.
- Gorbachev Coup, -2%, month later +3%, year later +15%.
- U.S.A. invaded Iraq, -2%, month later +8%, year later +35%.
- Covid pandemic, -30%, month later +23%, year later +73%.
- AVERAGE EVENT LOSS: … – 8.75.
- AVERAGE NEXT MONTH: … + 11%.
- AVERAGE, 1 YEAR: … + 37%.
WHAT SHOULD WE DO?
Nothing you need do at this time. Our portfolio teams have prepared ahead for expected volatility so they were already acting for us as Russia was building its troops around Ukraine’s borders. In weeks as we’re experiencing now, our teams have been selling some assets which rose to anticipated target values while at the same time buying other assets which had fallen into their desired “buy” range. These are creative times, very important times. In effect our portfolio managers use times like these to reduce risk and accelerate the upside we can gain over the months ahead.
Insights from our Mackenzie Bluewater group (DeGeer, Arpin, Taller, et. al.) summarize as follows. “Our strong preference for non-cyclical businesses is a core to our investment philosophy. We own businesses that are less sensitive to economic changes, have less competitors, have pricing power, generate strong free cash flows in pretty much most environments, and make sure their financial position is rock solid.” Thus in any downturn our holdings are resilient, and in recovery or continued growth we continue to reap rewards. This is our focus, and this is vital to all of our chosen portfolio teams.
BUT THINGS SLID BEFORE RUSSIA INVADED.
Lofty returns for 2021 actually peaked in Oct/Nov so markets have slid since that time. In part it was the onset of omicron, braking markets’ 18 month recovery from the March 2020 covid collapse. It has signified a healthy pause from unsustainable returns of fad-stocks with zero-earnings. There has also been caution as interest rates must rise from zero and sub-zero toward a range of two to four percent. Underlying these factors too is a shift from “growth” toward “value” which for a decade performed less vigorously.
- Toronto: 3 months, -2.3%. 1 year +15%.
- S&P 500: 3 months, -6.7%. 1 year +14%.
- NASDAQ: 3 months, -14%. 1 year +4%.
- UK FTSE: 3 months, +2.3%. 1 year +12%.
- EURO Stoxx. 3 months -7.5%. 1 year +7%.
- Japan Nikkei 3 months -10%. 1 year -12%.
- China US$. 3 months -13.6%. 1 year -34%.
- Russia MOEX. since Oct 20/21: minus 44%.
- FTSE Canada Bond Index. 3 mon. -1.8%. 1 year -2.6%.
- Cda Corporate Bond Index. 3 mon. -2.2%. 1 year -2.6%.
- Cda High Yield Bond Index. 3 mon. -1.2%. 1 year +2.1%.
- Russia’s precipitous descent: Putin, not Russians, at blame.
- The ruble has fallen, now worth less than a Canadian penny.
- Russian generals might be brushing up on the Ides of March.
Values are always fluctuating over days, months or seasons. We’ve seen this does not interrupt our progress. The future is bright. This theme has been true and consistent since March 1998 when I began publishing this letter. Our recent discussions include:
- September SWM Letter: Two Lessons, moments like 2010, 2011.
- December SWM Letter: Purpose, Peace, Prosperity.
- February SWM Letter: Patience, Prowess, Profits.
- ANDEX charts show the whole picture of world charts on a single fold-out. It’s barely visible here but ask me and I’ll email a copy to you, and we can discuss in any depth you may wish.
LESSONS FOR TODAY.
First, when values go down it provides fertile opportunity for our portfolio teams to rebalance, taking profit off the top and repurchasing assets that have come into range. An example of this is a stock that was sold in 2019 at peak valuation when its annual earnings were $1Billion; a portfolio team reported this week that they’ve bought same stock all over again at less than they sold it in 2019 even though annual earnings have continued pressing higher and have now reached $5Billion per year. That is rare but not unique: this is what our portfolio managers are doing year after year and contributing to our wealth and our financial goals.
Second, as you see above, downturns drive the momentum to new highs. Diminish your dose of daily news; keep doing whatever keeps you rested and refreshed. If you have concerns or someone you know is worrying themselves sick, we can certainly help. We’re here for you always.
Amid these times of change if we can update further in the days ahead I will send you a supplement mid-month or so. I only publish when there’s something meaningful, so I hope here you’ve found Hope and Perspective to assist your thoughts now and the days ahead. Meanwhile don’t overdose on the news, and certainly don’t worry about your accounts … that’s my responsibility, my passion, and indeed the stewardship of our whole team to protect you always.
Yours in Financial Security for LIFE!
Brian Weatherdon, MA, CFP, CLU, CPCA. 905-637-3500
627 Guelph Line, Burlington, Ont. L7R 3M7. 1-877-937-3500
Certified Financial Planner, Certified Retirement Coach
** This monthly letter touches on key strategies in Canadian and global investing and financial planning. This letter is not an offer to sell any kind of security, insurance, or program. Historical returns and risk measures are not a valid guide to future performance. Returns are from publicly available sources and research from a variety of firms including but not limited to Canada Life, CIBC, Dynamic, Mackenzie Financial, RBC / PH&N, and more. Opinions in this letter belong solely to the author and no other body is responsible for the content expressed here. We value opportunity to coordinate with your legal and accounting advisers to further your financial goals in home and business. We are grateful always to receive your comments and questions.