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Market update: Russian invasion of Ukraine

The Russian invasion of Ukraine has led to significant market volatility. We take a look at the implications for your clients’ portfolios.

The news of the invasion had an immediate yet so far, temporary, effect on global markets late last week. In the US, the tech-heavy NASDAQ started Thursday down 3% but rallied to a 3.4% gain. While the ASX 200 suffered a 3% drop on Thursday, it has partially recovered since.

The Russian share market has been exceptionally volatile, losing almost half of its value last Thursday before trading was suspended. The falls were compounded by sanctions from organisations like the US Treasury – actions which are intended to have economic consequences for Russia.

The sanctions, which now include the exclusion of selected banks from the global SWIFT payments system, a critical tool for international banking, will impact almost 80% of all Russian banking assets and limit the ability of both state-owned and private entities to raise capital. Financial restrictions on Russia’s central bank caused the value of the Rouble to plummet on Monday and threaten to cripple the country’s economy. The Russian central bank has raised interest rates to 20% in an effort to support the Rouble.

Unsurprising volatility

As unpleasant as the volatility is for clients, it is a regular feature of investing in emerging market countries. Russian President Vladimir Putin has made his intention clear for years, and Ukraine has been courting western aid to secure its borders after it lost Crimea to Russia in 2014 − so the current events are an extension of a longer story and the volatility in the Russian market has been seen before.

The scope of the conflict is expected to grow but its outcome remains unknown. A lot will depend on Ukrainian resistance and the ability for Russian forces to impose their will through force.

Ongoing factors continue to weigh on investors

While the conflict in Ukraine is dominating the news, there are other issues continuing to present a challenge for investors. Although the current Omicron wave of COVID-19 has decreased, we’re still seeing its effects on the economy. Similarly, ongoing inflation concerns and expectations that the Reserve Bank of Australia and US Federal Reserve will increase their respective cash rates have already caused a correction in equity markets, particularly tech stocks.

Adding to inflation concerns, energy prices have been surging recently, with the price of petrol expected to top $2.10 in March – and the conflict in Ukraine will only exacerbate the upward pressure on prices.

COLONIAL FIRST STATE CONFIRMS DIVESTMENT OF RUSSIAN ASSETS

Colonial First State confirms it is working with investment managers to divest Russian debt and equity investments. CFS has also prohibited the purchase of any new investments in Russia.

CFS’s portfolio exposures in Russia currently comprise less than 0.1 per cent of total funds under administration across both debt and equity holdings. The decision to divest Russian assets was made on Thursday 3 March, after closely monitoring the evolving situation in Ukraine over recent days. The divestment will be completed as quickly as conditions permit, noting that some key markets are currently closed.

CFS will continue to comply with all sanctions imposed on Russia in Australia.

Supporting you with your client conversations

As conditions evolve, CFS’s Investments team will continue monitoring geopolitical developments and the impact on markets. We have investments in companies that are based in Russia, which represent a very small proportion of total investments we hold. We comply with the sanctions imposed by the Australian government and are continuing to closely monitor the situation. We are also working closely with the investment managers we appoint to understand the investment implications of the events in Ukraine.

While media headlines can make a significant impression on investors, it is important to remind clients that investing can require a long-term view and that markets can take time to stabilise. As always, as developments unfold, our team will continue working closely with skilled investment managers to carefully identify the risks and opportunities in investment markets on behalf of our investors.

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The Colonial First State Investments team draws on their combined experience to deliver market updates and topical articles on the ever-changing investment and economic space.

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Unless otherwise specified, this document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (CFSIL) based on its understanding of current regulatory requirements and laws as at the date of publication. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), to the maximum extent permitted by law, no person including CFSIL, accepts responsibility for any loss suffered by any person arising from reliance on this information. CFSIL is the issuer of interests in FirstChoice Personal Super, FirstChoice Wholesale Personal Super, FirstChoice Pension, FirstChoice Wholesale Pension, FirstChoice Employer Super offered from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557. It also issues interests in the Rollover & Superannuation Fund (ROSCO) and Personal Pension Plan (PPP) offered from the Colonial First State Rollover & Superannuation Fund ABN 88 854 638 840. CFSIL also issues other investment products made available under FirstChoice Investments and FirstChoice Wholesale Investments, other than FirstRate Saver and FirstRate Term Deposits which are products of the Commonwealth Bank of Australia ABN 48 123 123 124, AFS Licence 234945 (CBA). The investment performance and the repayment of capital of CFSIL products is not guaranteed. This document provides information for the adviser only and is not to be handed on to any investor. It does not take into account any person’s individual objectives, financial situation or needs. The Target Market Determinations (TMD) for our financial products can be found at www.cfs.com.au/tmd and include a description of who a financial product is appropriate for. You should read the relevant Product Disclosure Statement (PDS) and Financial Services Guide (FSG) before making any recommendations to a client. Clients should read the PDS and FSG before making an investment decision and consider talking to a financial adviser. The PDS and FSG can be obtained from www.cfs.com.au or by calling us on 13 18 36.

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