The period since mid-December last year has been very difficult for investment markets. The main problem back then was the wide spread of Omicron, particularly in the United States and that of rising inflation. Over the last month, as I am sure you are more than aware, there has been a severe confrontation between Russia and Ukraine, which culminated last Thursday in Russia’s invasion of the country.
In the four week period leading up to the invasion, there was huge uncertainty within the markets as to what might or would happen and when it might/would happen. Investment markets do not like uncertainty as uncertainty makes investors nervous. Unfortunately, President Putin’s posturing and clever political “swerving” elongated the uncertainty which led to many investment markets around the world declining by an excess of 10% in a very short period of time. Due to the uncertainty created by Putin and his refusal to admit the possibility of war and the markets perceiving the opposite, this created a near impossible scenario to manage portfolios.
Ordinarily you would think that a country with a military the size of Ukraine’s would not last very long against a country such as Russia, however, 5 days into the conflict it would appear that Ukraine are putting up a very good fight. Therefore, it is possible that investment markets may be unstable for a while longer, but I do not see this as having a long-term effect on investments.
Even if the war is drawn out, the massive sanctions that the US, UK, EU, Australia, Canada and Japan have placed on Russia and certain individuals will squeeze Russia’s ability to import and export and in time will financially cripple them. The one main economic weapon that Russia possesses is that of energy. It should be noted that when Russia annexed Crimea in 2014, it promised to keep its energy flowing and indeed it did. Last week Russia said that it would keep its energy flowing throughout this conflict, however, we will have to wait and see whether that promise is honoured.
The reason I do not see investments being affected long-term are that the main short-term concern is that of energy and overcoming the investment markets fear that Russia will turn off the energy tap and create an energy shortage in Europe. If the markets can see that Europe can get sufficient energy elsewhere, they will become more confident and the uncertainty will dissipate.
I believe Europe will be able to replace 70 – 80% of its Russian energy supplies very rapidly, this is in the main due to extra supplies being available from Qatar and Japan releasing some of its huge gas storage, along with other Asian nations which are buying far more than they actually currently need, and therefore, be in a position to divert shiploads from their originating terminals towards Europe. The US has also promised Europe a vast increase in supply of its gas and although the oil price will likely remain above $100 per barrel by the end of this week, there is reasonable availability for purchase on what is called the spot market (the spot market operates as a kind of wholesaler that has the ability to deliver immediate orders).
Furthermore, if Russia does divert its energy away from Europe it’s most likely end point will be China. We know that China does not have the ability to store much more energy than it already does which means that if China does Russia the favour of purchasing its energy (which it probably will), then China will not need as much energy from its regular sources and these sources could be diverted to Europe, which would lessen the shortfall of energy in Europe and possibly even make it balance its energy requirements.
Such a scenario would create a further spike in inflation due to the increasing costs of this energy, however, these additional costs would be short-term, as of course, as soon as winter has ended in the northern hemisphere, there will not be the same requirement for this energy and therefore there will be excess supplies and the price will reduce. In turn this will reduce inflation.
Therefore, what I am suggesting is that it may not be a requirement for this totally unnecessary war to end before investment markets see that the light at the end of the tunnel is much brighter than it appears at the moment.
We do not use crystal balls in our analysis and future expectations, we centre on geopolitical risk and global macro-economics. What we are seeing at the moment, is what I have described above.
I trust this insight is of help to you in seeing how we manage your money and how well managed medium to long-term investing wins out at the end of the day.
Colin Fogwill, Investment Director
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