View on Russian invasion of Ukraine and exposure of F&C Investment Trust
The Russian invasion of Ukraine is causing significant volatility in markets and is exerting a terrible toll on the Ukrainian people. Commodity prices, including oil & gas as well as numerous other key commodities such as wheat have risen sharply and this will place further pressure on inflation rates globally. The immediate impact of Ukraine, beyond the unfolding humanitarian crisis, is to dent an economic recovery that was underway as the impact of the omicron variant of Covid 19 receded. It will also raise inflation in the near-term via the direct impact on food and energy prices and by exacerbating supply shortages. Expectations for global growth have also been cut, with Europe particularly exposed and there is now some greater uncertainty with respect to the near-term outlook for central bank policy. It may well be that interest rate rises are more modest than had previously been assumed as policymakers weigh risks to growth.
The longer-term ramifications of the Russian action are subject to great uncertainty but we should expect a lasting impact in several areas as a result of President Putin’s actions to reshape the European security order. Amongst other areas, the conflict will likely accelerate a re-orientation of political and economic links and lead to some fragmentation of the global economy and financial system. Such moves would further push against globalisation – one of the factors which had reduced inflation in recent decades. Control of energy supplies and expansion of alternative supply sources in the West will likely be given greater prominence and defence spending will rise while there will be a greater focus on onshoring of some productive capacity from the corporate sector.
F&C Investment Trust holds very limited exposure to two Russian securities. The combined weight of these two holdings was approximately 0.3% of total assets as at the end of January and our holding in these stocks was reduced after the conflict began. The local market exchange has, however, been closed and trading in Russian securities has been suspended. The Board have made the decision to write down the value of these holdings to zero for the time being and, once liquidity permits, to seek to divest all direct exposure to Russian equities. Index providers, including FTSE Russell, will remove Russian securities from market benchmarks in coming days.
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