Market Noise

Ruble turbulence contributes to a noisy end to the year

In recent weeks, a number of factors – Greek politics, French, German and Chinese PMIs, the continued decline in the oil price – have come together to rattle investor confidence and trigger some dramatic changes of direction across global financial markets, in extremely short-term phases.

Turbulence in Russian currency markets in particular has attracted a lot of attention. The first point to make is that much of the concern is focused on very short-term market movements, and heightened by the failure of the Bank of Russia’s surprise interest rate hike on Tuesday to immediately stem declines in the ruble. However, in our view, it is far too early to be declaring that Russian policy-makers to have lost all control and that a ‘1998’ is imminent. Firstly, for us, comparisons with 1998 are of very limited use. There are probably many more differences between now and then, than similarities. Today, Russia has much larger currency reserves and a healthy trade surplus. On the other hand, the Eurozone is in a more fragile state, and we should be mindful of the risk of contagion. Both situations are complex and potentially attributable to a great many factors.

Ruble swings

Furthermore, while the ruble fell dramatically on Tuesday, it recovered even more strongly on Wednesday, which highlights how problematic is to try and analyse these movements (see chart). Even if we could know how these events will play out over the coming weeks and months, it would be impossible to predict how this could impact broader markets, or how investors would react. We believe it is always important not to let short-term sentiment-driven market movements distract us from long-term fundamentals-based convictions. This is particularly true when looking at currency markets. Currency markets can be complicated and volatile, so it is especially futile to try and claim we understand what short-term movements could really mean in a longer-term sense.

While we are cautious on Russian assets given the genuine fundamental risks, when we observe high levels of very short term volatility, we believe it is important to be watchful for potential opportunities created by knock-on effects, away from the ‘epicentre’ of events. There are very different situations observable around the world today in terms of pace of recovery, policy and valuations and, unsurprisingly, we expect Russia’s problems will also have a varying impact on different regions. There are those such as Germany which have stronger trade links with Russia that will likely feel any impact more meaningfully than places like the UK, which as Mark Carney reminded us yesterday, has very modest direct links to economic conditions in Russia.

There are many more potential drivers of markets over the medium term than just recent turbulence in Russian markets. Something we expect to have a particular impact over the early part of next year is for the impact of recent declines in the oil price to play out in global economic conditions. We believe this will provide a meaningful boost to global growth in terms of the effective tax cut it is providing to businesses and consumers. Ultimately, our feeling is that this should be of more importance than the effect of the situation in Russia currently.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.