11/03/2022
Equity markets are well off their recent highs due to the Ukraine crisis. Although we are currently in the eye of the storm and there is no current resolution of the crisis how should investors respond?
The immediate effect was on Russian linked equities. The rapid de-listing of Russian equities caught investors by surprise. In London, Global Depositary Receipts (GDRs) of over 20 Russian companies were delisted and became worthless (since it is increasingly unlikely, they will be relisted). Today the steel company, Evraz had its shares on the LSE also suspended as its major shareholder Abramovich was sanctioned.
Now the only real way to invest in Russian equities is through ETFs many of which have suffered over 90% losses, are holding any worthless positions and trade at a speculative premium to their intrinsic value. Also, investors in emerging market funds that have included Russian and Ukrainian bonds have seen redemptions temporarily suspended.
The effects of sanctions on Russia and Russia’s counter sanctions on the west are unpredictable on other non-Russian assets in the short term. The situation is continually evolving and investors would be wise not to make knee jerk decisions with their investments.
Apart from oil and gas, Russia (and Ukraine) export many commodities that will impact the global supply chains that were still recovering from the covid crisis. For example, Ukraine exports a significant amount of grain and things that you would not expect such as 55% of the worlds sunflower oil and over 90% of Neon supplies for lasers used in US microchip fabrication.
Much of the inflation we now see in the western economies is actually the result of covid disruption of global supply chains and energy prices that were rising before the Ukraine situation.
Increases in energy prices feed through to the production and manufacture of everyday items such as food. Central Banks believed this inflation was transitory and supply side based and have been reluctant to rapidly raise interest rates. The recent high rises in GDP were viewed essentially a rebound from all the destructive lock-downs. Although rates have risen slightly over the last few months the Central Banks are cognisant of the large asset bubbles in equity and asset markets that have been driven by low interest rates and quantitative easing (QE) over the last few years.
The Ukraine crisis adds a new unexpected dimension to inflation expectations. The West will soon see high inflation, low growth and what is known as the dangerous predicament of stagflation, a situation never seen since the 1970s bear markets. The Central Banks will have to rise to the occasion and protect the economies through the crisis. This will mean abandoning and delaying future rate rises and resuming QE. Already Europe has announced mammoth bond issues to fund new energy infrastructure and defence projects. Hopefully a bear market will be avoided and equities will recover.
So, the best advice is in the words of the famous ‘Hitchhikers Guide to the Galaxy’ - Don’t Panic and stay invested. For those uninvested, prefer diversification across asset classes and look to energy and commodity stocks rather than ‘tech’ of the last few years.
Otherwise, for those investors that dislike volatility, stay out of the markets ‘until the dust has settled’ since there may be more short term downside until the Ukraine crisis has played out.
*The views expressed here are my own and do not necessarily reflect the views or values of any other companies which I am affiliated with.
