The outbreak of Russian military operations in Ukraine is a legitimate concern for investors and thus for many future retirees. The best way to protect your capital is to stay invested, according to Jean-Sylvain Perrig.
The outbreak of Russian military operations in the Ukraine is a legitimate concern for investors and thus for many future retirees, as it is their retirement savings that could suffer from the turbulence resulting from the deterioration of the geopolitical situation.
Thus, after the Covid crisis, we have entered another one, that of a war on European soil. If the pandemic could not be anticipated, the deterioration of relations between the West on the one hand and the Russian and Chinese dictatorships on the other, is not new.
A bit of history
Let's go back a few decades: once the Iron Curtain disappeared, it appeared that the capitalist democracies had won. Optimism reigned, China joined the WTO in 2001, and we all hoped that with the economic development of the Middle Kingdom, the country would become more open and tolerant. The 2008 Summer Olympics marked the climax of this period of capitalist euphoria and globalization.
However, the same year, the real estate financial bubble burst. Starting in the USA, it was to ravage the entire planet and plunge the world economy into recession. This was a wake-up call for many people. In the East and in Asia, it demonstrated the excesses of capitalism, and the West realized that only a small part of society was benefiting from the creation of wealth in a hyper-globalized world. Bitcoin was born out of this mistrust of a globalized world where when the banks fail, the economy stops.
It is since then that international cooperation has become hoarse, that divisions have manifested themselves within Western societies. Between 2008 and 2020, it is not new trade agreements that are signed, but rather new barriers to trade that are put in place. Because the Western middle class feels downgraded, threatened in its values by Islamism and asks to be protected. In this context, relations between Chinese and Westerners, but also between Russians and Westerners are deteriorating. The Chinese Communist Party, worried about its dominant position, is pursuing an increasingly aggressive domestic and foreign policy; and the Russians, after having tried to forge closer ties with the West in the 1990s, feel cheated by NATO and want to regain the influence they had before the fall of the Soviet Union.
The timidity of American foreign policy since the end of the Bush presidency and the naivety of Europe are opposed by two dictatorships whose ambitions are growing every day. However, these ambitions are not of an economic nature, they are about gaining power and influence.
A new era
The entry of Russian troops into Ukrainian territory marks the beginning of a new era, which in fact looks more like a return to the past. That of the end of the Second World War, when the world was cut in two. This is what is happening today, because China is leaning towards the Russian side, and let's not forget that President Xi will soon have to recover Taiwan.
The Ukrainian crisis seems to have woken up the Europeans. It took only a few hours for the German government, composed mainly of social democrats and ecologists, to release 100 billion for their army. This was unthinkable a week earlier. And this is probably just the beginning, Europe will have to take responsibility for its security, even in the unlikely event of a quick resolution of the Ukrainian conflict. The Americans are not reliable enough to delegate European defense to them. This is a paradigm shift. Military spending will make a marked jump in the budgets of European countries.
The war has also highlighted Europe's dependence on Russian gas. It is therefore urgent to find new sources of energy on the one hand, such as atomic energy, and to accelerate the energy transition, it will be necessary to invest massively in this sector.
And since the world is not doing so well, since the commercial partners are not reliable, it is necessary to organize the economy of the short circuits, independent of the exports of the great unreliable dictatorships of the planet. Incidentally, this is also a good thing for the planet, and in view of the stakes, we will have to go faster than initially planned.
A new investment regime
We are therefore entering a new phase of "de-globalization", that of green, technological capitalism and short circuits. We must build it. Regardless of the considerations, always random and short term, these changes will lead to investments on a scale similar to what happened after the Second World War when it was a question of rebuilding Europe. Unlike the last thirty years, it is the states that will be the main sponsors of these changes.
On the markets, Russia and Ukraine are small macroeconomic entities. Therefore, the impact of the conflict on the global economy will hardly be noticeable, although a surge in energy prices due to supply uncertainties will have a dampening effect on consumption. There is a small, but not zero, chance that the conflict will spread to the other countries of the former Eastern bloc. This would mean that nuclear powers would come face to face.
A third world war would take us back to the stone age. In this eventuality, the banking system would collapse, and only the gold held in the atomic shelter could still be of any use. A hacksaw would still be needed to cut the ingots into small pieces, in order to exchange them for food.
It seems unnecessary to plan for the worst. In the context of foresight, what happens in the short term is not very important. Volatility is inherent in the financial markets, which is why it is important to focus on the long term.
Protecting yourself from the loss of purchasing power
Equities are the most volatile asset class, but also the most rewarding over the long term, i.e. ten years and more. Today, valuations are low in Europe and in emerging markets. Only the US is more expensive than the average of the last 30 years, while interest rates remain close to zero. As for bonds, real estate is also expensive.
The 2020s are likely to be a decade of more volatile economic growth, with higher inflation than we have seen in the past. This is similar to what we experienced after World War II, because even if we don't have destruction today, there is a world to build.
Moreover, the leaders of democracies cannot alienate their population, it is likely that they will not hesitate to increase deficits in order to support the middle class, if energy prices soar or if recession strikes. As for the central banks, they have no choice, as the level of government debt does not allow interest rates to be normalized. We therefore have a fiscal and monetary policy mix that is very favorable for risky assets.
In order to protect your pension against a loss of purchasing power due to inflation, it is essential to remain invested at all times. Just as when you own a house, you don't sell it because the price drops.
When you choose an investment plan for your retirement savings, you have to think ahead to the end of the plan, in ten years or twenty years or even more. In this perspective, it is useless to wonder whether the markets will correct or not, but to choose a solution with which you are at peace, which allows the real value of your money to grow, with variations in wealth from one year to the next that you can bear.
Diversification allows you to reduce the gap between decreases and increases in the value of your assets. There is no need to follow the evolution of your investments from day to day, because 99.99% of the information about them is useless. Despite what some people would have you believe, no one can anticipate the evolution of the markets over the next few months.
Another important consideration is fees. The more expensive a strategy is, the more it will reduce the final result at retirement time. All things being equal, over 30 years, fees can "eat" up to 50% of capital, and therefore of the future annuity. It is therefore necessary to carefully select a quality strategy for the appropriate risk profile at a reasonable cost.
In conclusion, the times that lie ahead will be nothing like the last twenty years, but the best way to protect your capital is to stay invested.