Market Update to 4th March 2022.
This week the ongoing invasion of Ukraine by Russia unsurprisingly dominates. Optimism caused by the initial failure to capture the capital, Kyiv, quickly has given way to the fear that Russia will, but slowly, and, meanwhile, there’s an ongoing destruction of cities with artillery, and huge civilian casualties – a dreadful tactic used in previous wars in Chechnya and Syria. While sanctions and other non-military penalties are being applied, with differing degrees of conviction, there is little that can be done in the short term and the direction the conflict might take is extremely uncertain. This has certainly been a huge wake-up call for the West where this type of military action in Europe was thought to be a thing of the past.
Elsewhere while the fighting might be restricted to Ukraine, the fallout is not. As Russia rapidly becomes cut off from the global economy, both financially and physically, the disruption to the global economy is just beginning, starting with commodity markets. With inflation already high from supply chain disruption, it was significant that the Chair of the US Federal Reserve reiterated his commitment to tackle rising prices. While not comparable to the suffering being felt by Ukrainians, the economic pain will not be contained in the region either.
GLOBAL: MARKET VOLATILITY CONTINUES
Russia’s brutal actions in its war on the Ukraine continued to create a humanitarian crisis in Eastern Europe which has sent shockwaves through the global financial system.
As civilian and military casualties mounted, Russia leader Putin continued to stand firm in his aggression, with his stance sending commodity markets even higher. These sharp gains in both energy and food prices will further push upwards the already troublesome worldwide inflation whilst at the same time depressing growth as disposable incomes become ever more squeezed.
Although oil, gas and wheat were the main cause of concern, gains have been records across most commodities. Global raw material prices, which measured by the S&P GSCI Index, will record their largest weekly jump in over 50 years. The index includes energy, precious and industrial metals, livestock and agricultural products among others. These rising commodity prices will cause problems for central banks as they attempt to bring down prices without too much damage to growth. If they get this wrong and output is hit, they could cause a period of stagflation (negative growth with very high inflation, – which is precisely what the markets do not want.
The Russian central bank has increased interest rates by over double from 9.5% to 20% in an effort to stop the already 30% slump in value of the Rouble. Their currency was sent into freefall following sanctions that cut off major Russian banks from Western financial markets. Russian citizens have been banned from transferring money out of Russia, – so it’s all going rather well for Putin and what he sees as his own property of Russia so far!
The Euro had its worst week in 24 months against the USDollar. With the way in Eastern Europe and concerns about the massively increased gas and other commodity prices hitting the currency.
Global equities have fallen, with UK and European shares seeing some of the biggest drops among developed markets. US equities have also fallen with the technology heavy Nasdaq index falling more than the broader S&P 500 index. Investors sought the safety of government bonds early in the week pushing prices up and yields down. They reversed slightly later in the week as US Federal Reserve Chair Jerome Powell indicated the US central bank is likely to raise rates at this month’s interest rate meeting.
Gold, another target of investors seeking safety, saw some gains this week but the biggest increase is in the wider commodity markets. Energy and soft commodities such as corn and oats have risen, while wheat is up around 60% as Ukraine and Russia are two of the largest exporters. Industrial metals have also risen and palladium, a key component in catalytic converters in car exhausts, is up 20% due to disruption of Russian exports.
COMMODITIES: OIL AND GAS PRICES SURGE
Global commodity prices surged as the invasion of Ukraine continued. The international oil benchmark Brent crude surpassed $100 per barrel and hit a peak of $114, the highest level since 2014. Natural gas also jumped with UK wholesale prices rising 20%. Oil and gas prices have largely been driven by concerns about the security of future supplies. Although oil and gas are excluded from current sanctions, prices have also been driven up by numerous companies voluntarily refusing to import oil from Russia as a result of the invasion.
Earlier in the week the International Energy Agency agreed to supply 60 million barrels of oil from its emergency stockpile to help subdue prices, but this had a little impact. The increase oil and gas prices added to concerns of further inflation, however, when compared to the extent of energy price increases seen over the past 18 months the recent increases will have a far smaller effect.
The Moscow stock exchange stayed closed this week as officials try to prevent last week’s crash extending. With trading suspended and demand from overseas investors non-existent MSCI and FTSE Russell are removing Russian companies from their global indices. Russian companies with their primary listing in London have also seen their shares plummet. Mining Stocks Evraz and Polymetal are dropping out of the FTSE 100 at this month’s quarterly rebalance and Petropavlovsk will leave the FTSE 250 after their shares fell around 90% in 2022.
Western companies have moved quickly to sever ties with Russia. Oil companies BP, Shell and ExxonMobil are exiting joint ventures and global shipping firms Maersk, UPS and FedEx are refusing to handle non-essential cargo. Disney, Apple, Nike, Volkswagen and Toyota are among the companies which have suspended operations as they view the reputational cost of staying in Russia as far higher than the lost earnings.
Brutal attacks in residential areas have allowed Russian forces to tighten their grip across south-east Ukraine. In a television address, Putin was typically belligerent, despite the mounting casualties, and insisted he would never give up his conviction that Russians and Ukrainians are “one people”. However, the Ukrainian army is holding Putin back as Ukrainian President Volodymyr Zelenskyy rallied his country to resist the tyrannical and unprovoked aggression of Russia whilst most of the rest of European leaders remained shamefully impotent behind their largely empty promises of support for the Ukraine other than their token “wishing you well’s”.
The Ukrainian fightback is delaying and disrupting Putin’s plans for a quick takeover of the country. The West has admittedly strengthened its response somewhat by offering some military equipment to the defenders and increasing sanctions. The mention of peace talks look unlikely as Putin intensifies his attacks on Ukrainian cities with yet more indiscriminate violence. Putin has also put his nuclear weapons into a higher state of readiness which has scared the Western leaders to yet further impotency with their weak responsive bleats confirming that they have no intention of giving him an excuse to use them.
Putin’s strategy to get the West to back off and leave him largely to do what he wants in Ukraine has worked as none of the Western leaders has the stomach for an actual fight. Clearly it was much easier last time round moving into a region which was rich in the black gold that the West craves so much, – knowing that Saddam Hussain had no weapons of mass destruction to effectively launch a totally unprovoked attack on the region which ultimately did so much to de-stabilise the world, and which resulted in the terror and ultimate murder of millions of innocent civilians in Iraq than it is to actually take on a nation who can, and clearly would, resist and retaliate. Shameful, and to add insult to injury Tony Blair received a Knighthood in the Honours list. Answers on a postcard please!
Even NATO, who the Ukraine wishes to join, has decided not to help by declaring the skies over Ukraine a no-fly-zone after Putin warned that if they did so he would consider that an act of engagement in the war and so whilst Putin continues to commit his acts of atrocity, the rest of the world sits behind safely behind their desks in relative comfort doing nothing close to meaningful enough to help the brave Ukrainians, and one has to wonder, – is this really the right message for such a crass and twisted individual as Putin to effectively allow him to proceed unchallenged. The Western leaders appear to have learned all they know from Neville Chamberlain!
OUR PRESENT STRATEGY IS TO DE-RISK SIGNIFICANTLY IN LIGHT OF THE ESCALATING SITUATION
Having de-risked significantly during the last quarter of 2021, we now feel it is the time to act to protect client capital even more significantly by selling down the equity risk assets and we are currently in the process of doing just that for all of our UK clients and those clients of Simmonds Financial who have not yet moved away from us and who have responded to our recent suggestion that we do so.
We were already significantly underweight in equity risk assets compared to benchmarks right across the risk spectrum, but whilst that will provide us with all of the business risk protection that we need to be able to show clients that we have saved capital compared to benchmark that is not our aim.. Our aim is to protect capital on a total return basis and that means taking the difficult decision to not simply go underweight, but to sell down a further 75% from our already underweight equity positions across all risk profiles and to reduce to 0% across certain sectors. This is already reaping rewards for our clients. The view is that we would rather batten down the hatches and potentially miss some upside if the markets can, from somewhere, for some reason, find a reason to move meaningfully upwards, – than to remain with significant exposure to asset classes and tactical plays within which could see significant falls all the time the Ukraine conflict is escalating and the worlds markets are so affected by the resultant rise in commodity prices which affect both energy and food prices. This is not a good backdrop for equity prices.
So along with the action we have taken and continue to take in reducing equity exposure we are increasing weightings in the short term to cash, and buying up some short dated safe assets and some excellent new alternative strategies which might well perform positively in this environment.
If you enjoy reading this weekly update, please feel free to share it with your friends and / or family who may also find the contents of interest, and do not hesitate to contact us if you need any help, information or advice yourself about any of the areas covered this week.
Philip A. Simmonds LL.B(Hons), MBA, FPFS, Chartered MCSI
Chief Investment Officer & Head of Strategy | Solicitor-Advocate (non-practising)