Russia’s invasion of Ukraine, in what some fear will be Europe’s largest battle since World War II, has added volatility to markets which were already impacted by decades-high global inflation numbers, with interest rate hikes from various central banks (predominantly the US Fed) to follow during the course of the year. These combined events have understandably caused an inclination by some investors to reduce or exit their equity positions, on the assumption that the situation may worsen further.
Yet, political events do not tend to derail the course of economic trends and fundamental facts. According to Canaccord Genuity, “with the exception of world wars, most geopolitical events have created short-term volatility in markets which was ultimately reversed a few months later. In fact, the three-month, six-month and 12-month equity returns following such events are overwhelmingly positive”.
To contextualise the significance of the Russian and Ukrainian economies, the two countries combined represent about 2% of global economic activity and circa 2.4% of the global population. This in itself should not represent a material threat to global economic activity unless Europe, the US and China become involved in a protracted armed conflict.
An important caveat is that Russia plays a meaningful role in Europe’s energy supplies, and combined with Ukraine, the two countries account for 25% in the global trade of wheat, 20% of global corn sales, and 80% of all sunflower oil exports.
At Dynasty, we believe we have positioned our global equity portfolios to protect investors from the risks as identified above. Although we cannot possibly claim to predict how the Ukraine conflict will unfold, the equities we hold are primarily globally diversified, non-commodity related, have low input costs relative to the market as a whole, and generate free cash flows. Moreover, all our global funds have a focus on defensive sectors where incremental earnings growth can take place, irrespective of the economic environment.
The above investment philosophy should provide some comfort to our investors in terms of what we believe to be a defendable position for these trying times.
“The year can be thought of as three Acts, and I do think we are in the hardest Act right now. The first quarter is where the growth uncertainty is the highest, where the inflation uncertainty is the highest, where the policy uncertainty is the highest and where the geopolitical uncertainty is the highest. These are also factors that could look very different in April or May, which is important to keep in mind.”
– Andrew Sheets, Morgan Stanley
- Interestingly, this article compares current stock markets with those during the Second World War. The deep dips and lows are not exactly where one would expect them to be. Most people would expect the sharp dives in the stock market to come in September of 1939 and December of 1941, with the invasion of Poland and Pearl Harbour respectively, but this was not the case.
- Stocks normally take geopolitical risks in their stride. As an example, following the 9/11 terrorist attacks against the United States on Tuesday, 11 September 2001, the total drawdown of 11.6% on the S&P 500 was reached 11 days after the event. The recovery to the pre-event level – the point immediately prior to the attacks – took only 31 days.
- US president Joe Biden has announced what he called the “first tranche” of sanctions against Russia, including steps against its banks, saying Moscow started an invasion of Ukraine. Russia’s government has been cut off from western financing, with the measures also targeting financial institutions and Russian “elites”. The White House has said that Russia’s deployment of troops into two Moscow-backed, self-proclaimed republics in eastern Ukraine is the “beginning of an invasion”.
- One of the consequences of the spat is that neither Qatar, nor any other single country, has the capacity to replace Russian gas supplies to Europe in the event of disruption due to a conflict between Russia and Ukraine. “Russia [provides] 30 to 40% of the supply to Europe. There is no single country that can replace that kind of volume. There isn’t the capacity to do that from LNG,” minister Saad al-Kaabi told reporters at a gas conference in Doha.
- Although the spike in the oil price increases inflation pressures in the near term, this may not necessarily stop inflation falling later this year, because it is the change in the oil price, not the end level itself, that affects inflation.
- The increase in the oil price is a de-facto tax on oil-consuming economies, which threatens to reduce economic activity in non-energy sectors.
- United States stocks ended sharply higher on Thursday, led by a 3% gain for the Nasdaq, in a dramatic market reversal as US president Biden unveiled harsh new sanctions against Russia after Moscow began an all-out invasion of Ukraine. The S&P 500 rose 1.5%, ending a four-day slide amid worries over the escalating crisis. The Dow Jones also ended in positive territory.
- According to Credit Suisse Group AG strategist Zoltan Pozsar, Russia still has about $300 billion of foreign currency held offshore – enough to disrupt money markets if it’s frozen by sanctions or moved suddenly to avoid them. Pozsar sourced data from the Bank of Russia and financial markets to calculate the figure, saying: “If things escalate, it’s hard not to see a direct impact on FX swaps and US dollar Libor fixings given Russia’s vast financial surpluses and where those surpluses are deployed”. Russia’s central bank and private sector have almost $1 trillion of liquid wealth.
- In Canada, rapidly increasing food prices are putting a strain on household budgets, forcing more people to turn to their communities for their next meal, and grassroots groups are stepping up in new ways to help. Food prices jumped 6.5% in January 2022 – the biggest increase in more than a decade, according to Statistics Canada.
- The Pentagon has approved the deployment of 700 unarmed National Guard troops to the nation’s capital as it prepares for trucker convoys planning protests against pandemic restrictions from next week. The troops will help with traffic control during demonstrations expected in the city in the coming days.
- Surging metal prices have shielded South Africa from the worst of the market turmoil that followed Russia’s invasion of Ukraine. The JSE is down a relatively modest number of 4.58% year-to-date in dollars versus the MSCI at a negative 9.47%.
- Anglo American has claimed its place as one of the biggest beneficiaries of the global economic recovery and higher commodity prices, posting a record annual profit and paying out $6.2 billion in dividends. The results round off a blockbuster earnings season for heavyweight miners.
- This past week was a big one for the South African economy as finance minister Enoch Godongwana presented his maiden national budget. In it, he stuck to his predecessor’s pledge to cut corporate tax and provide relief to workers while resisting pressure to use an almost R200 billion revenue windfall to commit to a permanent increase in welfare spending. Government pledged to maintain fiscal discipline that will see it record a primary surplus, meaning revenue will be higher than spending excluding interest payments, a year earlier than planned.
- There are two budget take-outs that are of further interest to us: Firstly, changes to regulation 28 of the Pension Funds Act, due to be published in March, will probably allow 35% of assets to be invested offshore in addition to the 10% allocation for investment in African markets outside SA. Secondly, provisional taxpayers with business interests need to declare their assets and liabilities in their annual tax returns. Ensuring SARS can detect non‐compliance or fraud through unexplained wealth, all provisional taxpayers with assets worth more than R50 million must declare specified assets and liabilities at market values in their 2023 tax returns.
- The budget for Arthur Fraser’s office as director-general of the State Security Agency grew by 621% during his first full year as intelligence boss, documents and affidavits submitted to the Zondo Commission show. Fraser is the man behind former president Jacob Zuma’s early release from jail on medical parole. The increased budget allowed Fraser to spend hundreds of millions of rands directly managing covert operations, which included projects allegedly instituted for the benefit of Zuma. The budget available to Fraser’s office grew from R42 million in the 2016/17 financial year to R303 million in 2017/18.
- In a piece for Daily Maverick, Rebecca Davis aptly summarised what we can expect from the EFF in the run-up to the ANC electoral conference in December: A move towards even more populist policies; accelerated attempts to destabilise governance and ensure the EFF’s proximity to state resources; and an intensifying attack on the legitimacy of the judiciary and the South African criminal justice cluster.
- Jacob Zuma has lost his bid in the Pietermaritzburg high court to have prosecutor Billy Downer booted off the decade-long Arms Deal case. Zuma’s trial is set to commence in April. For 13 years, John Hlophe and Zuma have been bound by a legal umbilical cord to newly democratic South Africa’s original sin, the Arms Deal.
- Another high-profile legal case is being characterised by Stalingrad tactics similar to those used by the Zuma defence team: Prosecutors in the case of suspended ANC secretary-general, Ace Magashule, have accused him of using delay tactics to avoid pleading to numerous criminal charges. The former Free State premier, ten others accused, and five companies face more than 70 charges of corruption, fraud and money laundering. The charges relate to the alleged irregular awarding of a R255 million asbestos roof removal contract in October 2014.
Sources: Dynasty, BusinessTech, Reuters, BusinessLive, News24, Bloomberg, Daily Maverick, The Guardian, Canaccord Genuity, etc.