We wrote in March about how the war in Ukraine could change everything. In fact, according to Professor Yuval Harari, an Israeli public intellectual and historian, what’s at stake for everyone across the globe increases as the conflict continues.
More than two months into the conflict, Ukraine and Russia have not yet managed to reach an agreement on the way forward to bridge their differences.
As a result, the world economy is becoming increasingly deglobalised. Budgets destined for healthcare and renewable energy are being diverted to military budgets, further compounded by the need to secure alternative, non-Russian fossil fuel energy supplies. Cultural contracts are being severed and Europe’s borders fortified.
In addition, most countries have sanctioned Russia, limiting the coal and oil it provides, while Ukraine, as a major exporter of wheat and sunflower oil, has had its outputs severely hampered by the war.
The long-term effects on these moves have yet to be seen, but we anticipate a structural shift in supply chain management, and the forging of geopolitical strategic alliances on both sides of the divide.
Corporate America has not been immune to this political polarisation as evidenced by S&P 500 companies’ Q1 results. For example, we saw the impact of sanctions (deglobalisation) on mega companies such as Meta and Google-parent Alphabet, which reported weaker-than-expected earnings and revenue this week, citing sanctions against Russia as a contributing factor.
Our selected portfolios have not been immune to this fallout either, but the major influence on equity markets, in our view, remains the course of global inflation. We take comfort from our consistent approach of investing in winning organisations that trade on a global basis, are developed market listed, have strong brands with pricing power, generate free cashflow, and have protective moats around their businesses. We believe this strategy remains defendable in an environment in which political polarisation and sanctions could yet intensify.
“Globalisation has made us more vulnerable. It creates a world without borders and makes us painfully aware of the limitations of our present instruments, and of politics, to meet its challenges.”
– Anna Lindh (19 June 1957 to 11 September 2003), Swedish lawyer and Social Democratic politician
Global News
- Russian and Indian officials have met in a bid to resolve an impasse over the shipping of coking coal to Indian steelmakers, which has dried up since March over payment methods. Russia usually supplies about 30% of EU, Japanese and South Korean coking coal needs, while India planned to double its Russian imports to about nine million tonnes this year.
- A consequence of the ongoing war between Russia and Ukraine is that the world’s supply of cooking oil is declining, and the situation is getting worse. Two months after Russia’s invasion of Ukraine upended global agricultural trade, Indonesia is set to ban exports of cooking oil in the wake of a local shortage and soaring prices, adding to a raft of crop protectionism around the world. The country accounts for more than a third of global vegetable oil exports, with China and India, the two most populous countries, among its top buyers.
- According to Bloomberg, Germany is prepared to back a gradual ban on Russian oil as EU countries scramble to respond to an escalating energy crisis that saw Moscow cut off gas supplies to two of the bloc’s member states on Wednesday.
- Russian Foreign Minister Sergei Lavrov has warned of a “serious danger” of nuclear war, adding that conventional Western weapons are legitimate targets in Ukraine. This follows news that the International Criminal Court will be joining a war crimes investigation team looking into allegations of Russian war crimes.
- Ongoing sanctions imposed on Russia by the US, the EU and the UK will result in Russia’s third largest mobile phone provider Veon securing a smaller share of its business from that country over the next few years as it focuses on growth in Central and Southeast Asia. Nearly half of Veon’s revenue comes from Russia and about 15% from Ukraine, where its towers have been destroyed and its offices turned into shelters.
- Google-parent Alphabet is set to miss analyst expectations as revenue in the first three months of the year took a hit because of the company’s decision to suspend activities in Russia. It also faces lacklustre advertising sales in Europe and a poor showing by its YouTube video service.
- Meta’s share price surged as much as 19% yesterday. The company has reported a 21% drop in profits for the second consecutive time, although user growth pleased investors. Mark Zuckerberg, the founder of Facebook, has staked his company’s future on the Metaverse in which it has invested heavily. Later this year, Zuckerberg said Meta plans to announce a new virtual reality headset, codenamed Project Cambria, which he claims will replace laptops.
- With inflation creeping up, central banks are hiking interest rates. Thirty-five countries have increased interest rates during 2022, twenty have kept rates unchanged, and only one country (China) has cut rates. In March, consumer inflation in developed markets averaged 6.4%, up from 1.2% last year. Much of this was due to higher energy and fuel costs aggravated by the Russian situation.
- The direction of equity markets will be largely determined by how quickly global inflation moderates over the coming months, especially given the base effects. For example, if the oil price drops to around $85 a barrel, from current levels of around $100, energy inflation could slow from the current level of approximately 70% year-on-year to a mere 3.5% year-on-year by October 2022. This would make a huge difference to the trajectory of rate hikes.
- Meanwhile, equity markets posted positive returns on Thursday, with the MSCI World Index, the S&P 500, and the DJI returning 1.94%, 2.48% and 1.85% respectively. However, this was not enough to offset the losses from the rest of the week. At the time of writing, before markets opened on Friday, these indices’ weekly performances were -0.53%, -0.19% and -0.39% respectively, further compounding weak returns experienced during the month prior to this week. For the month, the MSCI World Index has returned -6.12%, the S&P 500 -5.29%, and the DJI -2.20%.
- In a short interview published by BusinessLive, Ninety One CEO Hendrik du Toit discusses the normalisation of financial markets as rates increase in the US. He talks about what ill-discipline can invoke on society and how, based on the 1970’s inflationary environment, yields are currently normalising to combat a repeat of inflationary effects over time. The focus for investors for the foreseeable future, he says, needs to be on avoiding political risk and price perfection.
- Advertisers could be wary of spending on Twitter if Elon Musk pushes ahead with plans to promote unfettered speech on the social media platform. This is according to analysts and comes after the world’s richest person signed a deal this week to buy the company for $44 billion.
Local News
- Deglobalisation of trade will accelerate as companies pull back from outsourcing to foreign countries, writes Jonathan Munemo, professor of economics at Salisbury University. Those living in sub-Saharan Africa will be the hardest hit, as poorer nations tend to spend a higher percentage of their income on food. The risks for Africa have been confirmed by findings in a recent World Bank report, which shows reshoring of value chains has the potential to push an additional 52 million people into extreme poverty.
- The big story in South Africa this week, and for the month of April, has been the sharp depreciation of the rand, which was not unexpected from the currency’s relative strength earlier this year. We wrote about this trend in January and earlier this month. Week-to-date, the rand is down 1.41% against the dollar, bringing its total monthly depreciation to 8.9% at the time of writing. This was accompanied by higher yields on South African longer-term government bonds (R2032 and R2048), somewhat illustrating foreign investors’ aversion to these instruments.
- At the same time, the SA government has set aside R20 billion to support struggling small businesses thanks to the ongoing pandemic, July 2021 social unrest, and recent devastating floods. Called a “bounce-back scheme”, it seeks to correct the many design flaws of the original loan scheme launched by President Cyril Ramaphosa at the height of the Covid-19 crisis.
- This comes as SARS boss Edward Kieswetter warns that the tax collector faces underfunding of R9 billion over the next three years while the institutional rebuilding after state capture continues.
- The ANC’s National Executive Committee (NEC) has tightened the loopholes in its rule on leaders who face criminal charges. This after some members abused the rule’s shortcomings by being elected to positions and causing “serious reputational damage” to the party. The NEC agreed that “any member who stepped aside voluntarily following an indictment to appear in a court of law on any charge” should not be allowed to run for a branch, regional, provincial, or national executive committee position.
- Bloomberg today confirmed news about a revelation by the Zondo Commission that Eskom entered into irregular contracts worth R14.7 billion, mainly with entities linked to members of the Gupta family. The judicial report points a finger at former President Jacob Zuma who knowingly facilitated audacious and indiscriminate looting at the state power utility during his nine-year rule.
Sources: Dynasty, Bloomberg, BBC, News24, BusinessLive, Daily Maverick, Reuters, TimesLive, News Day, Economic Times, etc.
