Political stock markets
are short-lived

Geopolitical events such as the current conflict between Russia and Ukraine usually cause great uncertainty among market observers. An 80-year analysis of geopolitical events and their impact on the stock market (S&P 500) shows a small negative impact that is short-lived. The stock market saying: "Political stock markets are short-lived" can be traced back to this fact. On average, the stock market loses 4.6 percent after 20 days in the wake of a political event. The recovery of this decline is already completed after a 43-day period after the occurrence of the event (see chart).

Low negative impact of geopolitical events on the equity market

Source: LPL Research, S&P Dow Jones Indices, CFRA

We assess the outbreak of war in Ukraine due to the attack by Russia on the basis of historical analysis and therefore expect behaviour in line with history. A short negative market reaction followed by a quick recovery.

Outlook for the coming 9-12 months

Due to the negligible influence of geopolitical events on the stock markets, the assessment of the fundamental situation is much more important for us. This consists of more than 250 indicators and provides an environment of increased uncertainty for the coming months. The economic slowdown (see chart 2) is causing nervousness and leading to increased fluctuation in price development. Take equities, for example: the decline in corporate profits at high equity market valuations is contrasted as a counter-indicator by overly negative investor sentiment (see chart 3). Depending on the market situation, investors assign greater weight to the positive or negative indicator and position themselves accordingly. In the event of rapid changes of opinion, this creates an environment of increased volatility.

Economic trend with expected low level in March 2023

Source: Refinitiv Datastream

Investor sentiment too negative

Source: Refinitiv Datastream

Nevertheless, we expect a gradual improvement in the course of the third quarter with a calming of the situation. Although media coverage will still be dominated by negative economic reports, the financial markets are already anticipating the end of the economic downturn from March 2023. As a result, there will be a reduction in fluctuations and prices will rise again. We will adjust the allocation in the mandates accordingly in the course of the year.

Strategic classification of equities

We consider equities as a return driver in the portfolio context. However, the probability of occurrence of this return can only be increased with a longer investment horizon. Therefore, the higher the equity ratio in the portfolio, the longer the investment horizon. Phases of increased volatility are part and parcel of equity investing and must be endured at times.