Since the end of February, the news has been dominated by Russia’s brutal invasion of Ukraine. This is the greatest geopolitical disaster in Europe since World War II, with repercussions around the world. It cannot be ruled out that the conflict may last for a long time and expand considerably before it can be resolved.

The MSCI World index, which tracks the international stock markets, fell by 1.4% in euros in May, and the S&P 500, which represents the 500 largest companies in the US, lost 1.7% of its value. Somewhat illogically, European stock markets rose in May, with the Euro Stoxx 50 index, which tracks Europe’s largest companies, rising 0.9%.

World economic history teaches us that wars lead to accelerating inflation, but the current period of inflation began somewhat earlier. The Ukrainian war has simply added fuel to the inflationary fire ignited by erroneous monetary and fiscal policies.

The world economy is a complex system in which different processes and often opposite trends are constantly intertwined. Adding to the complexity is the fact that decisions usually have to be made based on historical data, while their impact can often only be realised years later.

The need to slow growth

Both monetary and fiscal policies have gradually tightened in many parts of the world, and this trend is likely to continue for some time. Governments and central banks face difficult decisions. Slightly higher unemployment is likely to have to be accepted to control price increases. Economic debate is currently focusing on the success of a “smooth landing” for the economy.

Unfortunately, there are no easy and risk-free solutions in difficult times. Although stock markets have fallen somewhat, this does not mean that there is no room for them to fall further. The impact of rising interest rates on real estate markets has not yet materialised and prices are still at record highs. At the same time, there is nowhere to hide from risk, as the purchasing power of money in bank accounts is declining and so-called risk-free (low-interest rate) bonds are now almost the biggest losers.

In such difficult times, when the economic environment is undergoing major changes, shorter-term and more secure cash flows are of greater value than potential profits in the distant future. The LHV team has long focused on companies and projects that value strong cash flows, are financially sound and operate flexibly to survive even more difficult times.

Based on these investment principles, we have so far been able to protect the unit-holders of LHV pension funds from this year’s downturn in the financial markets. In public markets, for example, we focus more on the energy industry and precious metals, in bond markets we avoid long-term securities and work with local companies, and we make sure that our real estate transactions bring unit-holders a most attractive rental income guaranteed by long-term contracts.

Those who had the wisdom and discipline to build up reserves during good times will survive the difficult times more successfully. It is reserves that allow flexibility and opportunities to be seized. This concerns people, companies and states alike. As the environment changes, it is wiser to adapt and be prepared to change your usual activities to survive the difficult times with less pain or even emerge victorious.