Amongst the sheer volume of urgent daily events, detail, and information to digest at the moment, the most important attribute for investors is to ensure that it doesn’t distract them from what matters most. Think long term. At a time like this, when everything seems to be on a knife edge, it is critical for investors to understand they need to zoom back out and not allow themselves to be engulfed by the all-consuming urgency of the 24-hour news cycle. It will overwhelm your thinking if you let it.
That said, the current short-term events from war in Ukraine, to supply chain disruptions, and inflation, do have significant long-term implications too. So, it’s important to understand that the macroeconomic and geopolitical events occurring now are changing the world. Understand also that unless there is a serious escalation in the war, investment markets will adjust and move on. But it is important to look through all the data and news and work out what actually matters from an investment perspective.
The main short-term trends are:
Inflation was already heading higher across the world due to supply chain issues
The war in Ukraine makes this worse as it’s forced almost every commodity price to increase
The food commodity shortage has the potential to be an economic & humanitarian disaster
Europe heading for recession with a low growth and high inflation environment which is bad
USA is similar to Europe, but they have a better economic backdrop and prospects
Australia is in a better position. Yes, high inflation is coming but likely higher growth too
Short term trends do matter for long term investors. They bring opportunities to take profit on an overpriced stock or buy an undervalued company. The short-term volatility will impact your entry and exit points for assets, the timing of when you might invest. This is especially an issue for new portfolios being established. However, it’s more important to understand the impact of the current situation on long-term global trends and adjust accordingly.
The main long-term trends are:
Significant increase in defense spending globally
Globalisation unwinding in preference for national interests
Long term economic decoupling from China and the West
Energy independence and growth in national renewable energy sources
Sustainability refocuses to start with national security strategy
Technological advancements continue regardless
Long term trends influence where you will invest. The increase in defense budgets globally will create huge demand and growth for a range of businesses across industries, not only defense. After decades of underinvestment in defence and short-sighted strategic thinking, the current crisis has awakened most countries to the need to become increasingly self-sufficient with more turbulent times ahead.
Chinese stocks and US listed Chinese companies, regardless of their returns and potential, remain uninvestable as far as I am concerned. Even when they are attractively priced, these companies (eg Alibaba, Baidu, Tencent) risk being torpedoed by their government on a whim, without notice. It makes the allocation of portfolio capital to this area too high a risk.
Beyond the obvious though, unless China categorically distances itself from Russia, the likely result is the West doing to China what they did to Russia, but over a 10-to-15-year time frame. So significant realignment is coming for all businesses doing business with China over the next decade. The flip side is more opportunities for businesses in Europe, the USA and Australia.
Energy across the board will be a huge focus. In the short term, it’s great for almost all energy companies as there simply needs to be more energy supply secured by Western nations. Long term, I expect a rapid rise in renewable energy as the climate issue merges with the strategic national security issue. Governments will push hard here for many years ahead, climate and sustainability will be the sell to the community, but the end game here is securing energy independence and national security.
The flow on effect of these huge new capital allocations are important.
But the #1 most important long term mega trend remains the continuous disruption of technology. Don’t lose sight of that. Even in a market where most tech stocks are out of favour, that remains the most important trend. It influences almost every investment decision I make. It influences the types of companies we buy shares in and those we avoid, which is just as important.
The short-term issues may impact the prices we pay and the timing of investments but behind the scenes, all sorts of incredible companies are continuing to work relentlessly to change the future. So, understand what’s going on in the short term, because it is important, but keep focused on the long term because that’s what really matters for long term investment returns.
General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.