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9 Mar 2022

Ukraine invasion: the impact on pensions and investments

Russia's actions have sent shockwaves through the global economy

Russia's invasion of Ukraine has rocked global politics and markets.

The ensuing war and sanctions levelled at the Russian government and companies have already impacted on the cost of living.

If you've checked the value of your investments or pensions recently, you might have noticed some sharp falls.

Here, we look at the market turbulence brought on by the tragic events in Europe, and offer advice on managing your pension and investments during a period of escalating geopolitical tension and rising inflation.

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How has the crisis impacted stock markets and inflation?

There have been severe ups and downs across financial markets as investors respond to the rapidly developing crisis.

When news broke of Russia's invasion of Ukraine on 24 February, markets saw heavy losses - with Moscow's stock market shedding 38%, while the FTSE100 dropped by 3.9% and the European index EuroStoxx 50 fell to its lowest level since March 2021.

Global stock markets shot back up the next day - before declining after that as the implications of sanctions on Russia and other countries became clear. While uncertainty persists, markets are likely to remain volatile.

Russia is a major oil and gas supplier, and together Ukraine and Russia produce almost a quarter of the world's wheat.

Now, international sanctions on Russia mean the price of food and fuel is set to rise even further, exacerbating inflationary pressure. The price of oil hit $139 at one point, the highest level in almost 14 years.

With a constant stream of news - and seeing your investments fall - it's important to keep a cool head. Selling at the wrong time means you're denying your investments the chance to recover.


Are you invested in Russia?

Not many UK investors hold Russian stocks.

There are few Russia-focused funds, due to lack of demand, and in the wake of the military assault a number of asset managers - such as PNB Paribas Asset Management and Liontrust - have suspended theirs.

If you're invested in global or European equity funds, these are unlikely to have many investments in Russia. According to Morningstar Direct data, Russian equities make up just 0.27% of long-term European assets in funds and exchange-traded funds, as of 31 January 2022.

You're slightly more likely to find Russian stocks in emerging market funds. But MSCI's decision to remove Russia from its emerging market indices makes this less of a concern for those invested in emerging market funds that track an index.

Your pension may be invested in Russia by holding emerging market funds, sovereign debt or stakes in major Russian companies such as Gazprom.

But more and more pension fund managers are slashing their Russian holdings. So far, Aviva, Abrdn, Nest, Janus Henderson and LGIM have all started selling - or announced plans to sell - at least a portion, and in some cases all, of their Russian assets.

How could your investments or pensions be affected?

If you hold a defined benefit (DB, or 'final salary') pension, it's up to the trustees to deal with changing market conditions. Your payout should remain the same.

If you hold investments, or have a defined contribution company pension or self-invested pension plan, you might find the value has changed. Many major UK and US companies are affected by the war - BP, for instance, is to exit its holdings in Russian oil giant Rosneft at a cost of up to $25bn.

The war is also shifting investor appetites, impacting the value of assets that might appear to have nothing to do with Russia and Ukraine.

However, that doesn't mean you need to take action.

If you invest via a financial adviser, they should be your first point of contact, and they will adjust your portfolio if necessary.

If you invest via a fully managed stocks and shares Isa (such as those offered by Nutmeg or Wealthify, for instance), your portfolio will be reviewed and adjusted on your behalf. Defined contribution pension providers may offer a similar service.

On the level of individual funds, fund managers will adjust their holdings and strategy, though you should consider whether a fund's overall focus still suits your portfolio.

5 tips for investing in uncertain times

If you are a DIY investor who holds individual shares, bonds or commodities it's worth keeping these points in mind:

1. Don't panic-sell

There's a reason you're generally advised to invest for at least five years; it gives investments time to recover from crises.

When investment platform Bestinvest analysed 25 geopolitical crises - including Covid-19 and the Cuban Missile Crisis - it found that, on average, losses on the S&P500 were erased within the month.

There's no guarantee markets will recover as quickly from Russia's invasion of Ukraine. But if you sell now - then reinvest once the recovery has begun - you'll lose a lot more than if you'd stayed invested.

2. Review your investments

While you shouldn't let the crisis push you to make snap decisions, you should still consider making some long-term adjustments.

The most important thing is to check that your portfolio is diversified across a range of investment types, asset classes, geographies and industry sectors.

Look at the asset allocation in your portfolio and considering tweaking it if you find your investments are concentrated, for example, in tech stocks, bonds or the UK market.

If you need help reviewing your portfolio, it might be worth seeking financial advice. Check out our guides on how to find a financial adviser and how much an adviser costs.

3. Look at which sectors you're invested in

In an inflationary environment, growth stocks are especially vulnerable.

Growth stocks are companies predicted to deliver strong growth in the future. Not only do they tend to have high valuations, but they are also usually reliant on borrowing to fuel their growth - which makes them less attractive when inflation and borrowing costs are high. US tech companies are typical examples of growth stocks.

Companies that make things you always need - food, household items, hygiene products - are more likely to keep pace with or beat inflation.

You may also want to consider investing in companies that pay a dividend. This can provide investors with a stream of pay-outs to save or reinvest during times of uncertainty.

Investment firm Janus Henderson recently reported that the UK dividend market is booming - with income excluding special dividends having grown by 21% in 2021, compared to a global average of 15%.

4. Consider inflation-beaters like commodities

Gold has long been seen as a reliable store of wealth, as it holds its value during a crisis much more effectively than currency-backed assets.

Its price spiked in the immediate aftermath of Russia's invasion of Ukraine, rising to over $1,900 an ounce.

But bear in mind that, while gold can be a good inflation hedge, it doesn't offer investors a yield (unlike dividend-paying stocks). And if you're holding physical gold, it can be expensive to store.

Some commodities, such as oil and wheat, have been rising in price. But commodities remain volatile assets, so if you are considering investing in them, think about seeking financial advice.

More experienced investors can invest in commodities through a mutual fund or an exchange traded fund (ETF) to protect yourself from price swings - which you'll be exposed to if you invest in them directly via a futures contract.

5. Don't take on too much risk

The price of bitcoin peaked and then plummeted in the days following Russia's invasion of Ukraine.

In a volatile world, don't feel pushed to invest in highly volatile asset classes - always stay focused on your long-term investing goals.

You should also steer clear of investments offering high or 'guaranteed' returns - these could be scams. Always check the Financial Conduct Authority's ScamSmart tool.