Morningstar Investment Management's Global CIO, Dan Kemp, on the knock on effects of the Ukraine situation for investors.
Should investors be worried?
It's been really noisy in markets over the past few days. Energy prices, oil prices particularly, have risen. And so that's all understandable and all quite normal, The lesson is not to get drawn in as investors to these short-term changes.
A few days ago, people who felt that the markets are falling and that they should sell first thing next morning, would have been rapidly licking their wounds as they saw a recovery. Then there was a further leg down. It is the type of noisy market that draws people in, and whipsaws people into making bad decisions.
It is a very dangerous time for investors.
Will the price of crude keep rising?
At the very surface level, we see commodity prices rise, because Russia is a large supplier of energy, particularly oil and gas into Europe. And so when we see these geopolitical tensions, because people become concerned about supply, and therefore that leads to a price response.
But if we dig below that level, it becomes much more complicated. We have to keep an eye on what OPEC is doing, what supply is doing in the U.S. as well.
And also the fact that prices have risen very dramatically over the last 18 months following the trough, the height of the COVID crisis. And so people should never extrapolate future price movements, from either past movements or from these geopolitical events, because it's so easy to get that wrong and to miss a change in sentiment in the market. So although it's not a surprise that prices have risen, don't assume that that will carry on regardless of what Russia does over the next few days and weeks.
What do you think is going to happen?
You can never be certain about the outcome. This is one of the great challenges of all investments, that as you look ahead, the future is uncertain. We believe that there may be a future that we can uncover through enough analysis. But that's simply not the case.
We always have to think about the future as a range of probabilities.
Think longer term beyond these latest market wobbles and really into the deep value that we're seeing in markets and try to understand what the fundamental drivers of returns are.
So no, you can't ever predict the future, particularly over the short term, particularly when it comes to politics and energy and all that we're seeing around that noise at the moment.
So what must investors do?
What you can do is look at individual companies, look at asset classes, look a long way into the future, and what the expected returns are from the fundamental returns of these businesses, when you're given that longer timescale.
So always focus on the long term. Don't get distracted by the market noise and don't make quick decisions that you may live to regret later on.
This has been taken from a conversation between Dan Kemp and Morningstar UK's editor, Ollie Smith.
