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10th March 2022
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Graham BentleyGraham Bentley

As you might expect this month's commentary is dominated by the Russian invasion of Ukraine, despite its emergence late in the month. While I have personal opinions about the conflict as a humanitarian and political crisis, frankly it's my job to report on the impacts on wider investment markets, and to dispassionately share our thinking on investment strategy.

Committed to long-term investments

Let me start by reiterating our general position: we are charged with maximising longer-term returns within defined risk parameters, while erring towards strategies that minimise downside risk. We remain committed to the view that long-term investment success is predicated on investing in well-managed companies that provide consumers with quality products and services. 

Such companies generally require benign political and economic regimes to prosper. Consequently, our portfolios have only incidental (less than 0.8%) exposure to Russian debt or equity, and most individuals' accounts will have none. However, the 'fallout' from the invasion is clearly damaging prospects of global economic growth, and a falling tide sinks all boats, so to speak; consequently, market participants have reassessed companies' near-term earnings potential. During February, and to the date I write this (9th March) global equity markets are down between 3 and 15%, with European stock Markets (excluding the UK) suffered most, given their proximity to the conflict, and higher dependency on Russian supplies of oil and gas.

Economic sanctions on Russia

Market participants' expectations of continued recovery from the pandemic are now being revised. The astonishing coordination of nations' economic sanctions on Russia has effectively cut that country off from the rest of the world, while an increasing number of corporations have withdrawn Russians' access to major global brands - Coca Cola, McDonalds and so on - making it clear to the Russian population that their government's justification for the invasion is not shared elsewhere. 

However, sanctions will affect all of us. Our immediate economic concerns relate to food, energy and commodity price inflation. Russia and Ukraine are major wheat exporters, accounting for 30% of global wheat and 15% of corn exports. Ukraine is the leading producer of semiconductor-grade neon, while Russia produces 10% of the world’s oil and is Europe’s main supplier of gas. Russia is also the leading exporter of palladium, a vital commodity in the production of car exhausts and mobile phones, and Nickel, which is a key component of battery manufacture. Short-term interruption of supplies could impact production and exacerbate supply problems, thus adding fuel to the inflationary fire.

Energy prices soar

Meanwhile, Russia's key role as a provider of energy is not to be taken lightly. Any anticipated easing of post-pandemic inflationary pressures will now be delayed as energy prices have surged. The price of a barrel of oil (159 litres, incidentally) has risen steeply to $139, just shy of its all-time high in 2008 - but the exchange rate is lower. In 2008 the pound was worth $2 so oil then cost £73 a barrel. Today, with the pound worth $1.31, so oil actually costs £106 a barrel. The EU is now paying €285m per day for oil. At the start of this year, the EU was paying €190m a day for the natural gas it imported from Russia. As I write this, i.e. pre any sanctions on purchases, that cost is approaching €630m a day. While we apply these sanctions it can be argued Russia - for the time being - actually benefits unless the rest of the developed world refuses to buy Russian oil, and indeed the first hints of that are being detected, but without other oil producing countries like Venezuela and Iran (themselves already subject to sanctions) along with Russia's OPEC partners Saudi Arabia and the UAE literally manning the pumps, energy prices will stay elevated, severely reducing economic growth globally. 

Russia’s reliance on European cash

Despite this, Russia is far more dependent on European cash than Europe is on Russian gas and other commodities; sanctions have already closed off Russia’s access to capital, limiting its ability to process other currencies thus trade is grinding to a halt. Any retaliatory reduction in gas supplies by Russia would force Europe to buy its natural gas in liquid form from the US - longer-term this might be the catalyst for accelerated switching to renewable energy.

We should also remind ourselves that there are myriad companies whose earnings are unlikely to be seriously affected by this conflict. Unilever and Procter & Gamble will still sell branded goods worldwide. We will still buy Coca Cola, shop at Tesco, buy fuel from BP and Shell (whose share prices are rising in tandem with the oil price), drinks from Diageo and medicines from Astra Zeneca and Glaxo. Russian consumers may not be so lucky.

History is replete with geo-political tremors; while events seem shocking at the time experience tells us that exaggerated short-term market falls are ultimately recovered as events unfold, clarity prevails, and uncertainty reduces. Shocks like 9/11, the invasion of Iraq, the Cuban missile crisis, Pearl Harbour and so on saw immediate downsides that were more than compensated for in the longer-term.

And finally,

Moving out of the market and seeking a 'safe harbour' is inadvisable - out of the frying pan and into the fire springs to mind. Admiral Grace Hopper once said, "Ships in a harbour are safe, but that's not what ships are built for". Your portfolio is constructed to ride out storms, keeping an eye on the longer-term horizon – “time in” the market is far more fruitful than “timing” the market. Patience remains the best policy.

Graham Bentley
Chief Investment Officer


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