What does the chart show? 

This chart shows the calendar year total returns for the MSCI Europe ex UK index and the maximum drawdown the index experienced over each calendar year since 2000. Maximum drawdown reflects the greatest peak-to-trough fall over the period (the worst possible loss an investor could have made if they had bought at the peak and sold at the trough in the same calendar year). European equity markets have experienced heightened volatility in the past two months and uncertainty around the ramifications of the war in Ukraine which has weakened market sentiment. In light of the rapidly evolving situation, investors are finding a level which discounts the heightened risks and the financial consequences (which will be felt more in Europe given its higher dependence on Russian gas). Despite recent volatility, this year’s maximum drawdown (so far) of -21.4% is only marginally worse than the average calendar year maximum drawdown of -20.9% since 2000. 

Why is this important? 

Even during the strongest years for markets, there are always periods where markets fall. Volatility and capital loss are part of investing in any financial market and should be anticipated. Europe is more exposed to the financial consequences of the war than other regions and some of these financial implications are yet to become apparent. There are also other factors spooking the market at the moment: most notably Eurozone inflation reaching a record high of 5.9% in February – implying that tighter monetary policy and potentially slower economic growth lie ahead. After their sizeable falls, markets are rapidly discounting these risks and are offering some longer-term buying opportunities. Times like this tend to lead to a compression of investor time horizons. Now, more than ever, is a time for longer term perspective, riding out the short-term volatility, to participate in the recovery whose timing is unpredictable, but which surely lies ahead.