Maintaining the course may be the key to investing in wartime

Entire sectors of the world economy are in turmoil after Russia’s invasion of Ukraine, prompting investors to worry about how they should react. Do they have to buy energy reserves? Shares of defense contractors? How about agriculture? Is it time for cash?

Investors had good reason to be cautious even before the invasion of Russian President Vladimir Putin. First-quarter market forecasts forecast small gains of less than 5 percent for the S&P 500. A report by financial data firm FactSet Research notes that such a slow growth rate will be the lowest since the fourth quarter of 2020.

Instead, the S&P 500 ended the quarter, losing 4.9 percent. Fears of inflation caused a sharp drop in late January, and stock prices remained volatile even before Russian attacks began in late February. Stock prices fell just before the invasion, regained their positions, and then fell even lower in early March. But since February 23, the day before the invasion, the index has risen 7.2 percent for the quarter, suggesting there is more than the war in Ukraine, which is worrying the market.

“Initially, there was a lot of fear about what might happen, and as usual, most of it didn’t happen, so people backed off,” said Brad Macmillan, chief investment officer at the Commonwealth Financial Network. “Most investors think, ‘This is not something I have to worry about financially,’ and rightly so.”

This does not mean that investors who make the obvious war games have failed to cash in on the carnage. It has already been predicted that the energy sector will do well in 2022, before military sanctions cut off oil exports from Russia and end the quarter with only slight 52-week highs. Exchange-traded defense funds or ETFs that can be bought or sold all day as stocks give the same results with the iShares US Aerospace & Defense ETF, the SPDR S&P Aerospace & Defense ETF and the Invesco Aerospace & Defense ETF all do. profits. Additional burdens on the already tangled supply chain, as well as the expected disruption of Ukraine’s huge wheat harvest, have also pushed commodity funds up.

Instead of worrying about Mr Putin, investors should worry about Jerome H. Powell, chairman of the Federal Reserve. The Fed raised interest rates by a quarter of a percentage point in March for the first time since 2018 and predicts six more increases this year.

“The market reaction over the last four to six weeks has been almost entirely due to the Fed and how interest rates have moved,” Mr Macmillan added. “There was very little response to the events in Ukraine.”

Investors have not fully appreciated what rising interest rates mean for shares in the financial sector, especially banks and insurance companies, which have suffered from prolonged periods of near-zero interest rates, said Andy Kapirin, co-investment director of RegentAtlantic. “The market has not yet determined the benefits that financial stocks will receive from higher interest rates,” he said. “In particular, banks can make much higher interest margins as short-term interest rates rise.”

One fund he follows is the Invesco S&P 500 Pure Value ETF, which invests in S&P 500 stocks, with about 40 percent of the fund’s assets coming from the financial services sector.

Shares that could suffer from higher interest rates include shares of small, emerging software and e-commerce companies and other capital-intensive technology companies that depended on borrowing at low interest rates until they became profitable, he said. n Capirin.

Individual investors must maintain a long-term horizon even in retirement, which can last 30 years or more, said Simeon Hyman, ProShares’ global investment strategist. This means ignoring stock shares based on temporary shocks.

“Historically, the stock market declines from major geopolitical events have been quite short-lived,” Mr Hyman said. “If you look at what happened after 9/11, the global pandemic or the invasion of Kuwait, the decline is measured in weeks or months.

One interest rate-focused fund is the ProShares Equities for Rising Rates ETF, which is limited to sectors that have historically outperformed the market when interest rates rise. About 80 percent of its shares are in the financial, energy and material sectors. For a more defensive position is the ProShares S&P 500 Dividend Aristocrats ETF, a fund of stocks with rising dividends that can offset the effects of inflation and rising interest rates.

Amy Arnott, a portfolio strategist at Morningstar, has warned investors not to throw out stocks and move in cash. The low return on bank deposits and money market funds does not necessarily improve with the Fed’s rise in interest rates, and even if it does, they will still not beat inflation, leading to a loss in real dollars. What’s worse is that rescuing from stockpiles raises the much harder challenge of deciding when to return.

“You can always find a good reason to sell when there’s a lot of uncertainty,” Ms Arnott said, “but markets are recovering faster than people can expect.”

She said it was important not to neglect basic consumer goods and to accept that increased operating costs would reduce corporate margins. The reality is that these companies are able to pass on their increased costs to consumers, with some companies using inflation to hide further price increases.

“Consumer goods tend to hold up very well when there is a lot of volatility in the market,” Ms Arnott said.

Investors also need to pay more attention to bond funds, several analysts said. Bonds serve as an important stabilizer in a diversified portfolio, but today’s rising interest rates damage the value of existing bonds with lower interest rates. This trend will reverse when old bonds fall and are replaced by new bonds at a higher rate. The yield on 5- and 10-year corporate bonds is now nearly 4 percent.

“There’s a lot of talk about this: ‘Interest rates have gone up and my bond funds have fallen,’ but your bond fund can now reinvest your money with a higher return,” Mr Macmillan said.

One move that doesn’t involve drastic change is simple, said Liana Devini, vice president of Fidelity’s investment center in Framingham, Massachusetts: rebalance your holdings.

“In volatile markets, diversifying your assets can change, and rebalancing allows you to manage risk and keep your investments in line,” Ms. Devini said. “We want to buy cheap and sell high, and rebalancing is a great way to do that.

How often investors have to rebalance their assets depends on the level of market volatility, she added. Fidelity’s management team has already rebalanced its investments six times this year.

For investors still worried about Ukraine, Covid, supply chain shortages, oil prices and other geopolitical unrest, the best move is to put together a diversified portfolio that can handle global crises without the need for major adjustments. And investors who have already done so should not make knee decisions, analysts say.

“The best advice for investors is to try to resist the urge to make dramatic changes to your portfolio,” Ms. Arnott said. “While your original plan still makes sense, stick to your plan, make sure your portfolio is in line with your goals, and rebalance if necessary.

If investors are still worried after all this, consider this observation by Mr Macmillan of the Commonwealth Financial Network: “If you look at the last century and how markets perform during the war, they are actually doing better,” he said. he. “As a citizen, am I worried? Absolutely. As an investor, not so much. ”

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