“No one can predict with any certainty which way the next 1,000 points will be. Market fluctuations, while no means comfortable, are normal.” — Peter Lynch (a Renowned Investor and Fund Manager)
One would argue that these are not normal times with Russia invading the Ukraine. Volatility has been the ‘norm’ since the beginning of 2022, albeit initially based on the uncertainty around the quantum of interest rate hikes planned by the Federal Reserve. This would then drive other central banks around the globe to follow a similar trajectory. However, life is never that simple or linear!
Let us look at what the Ukraine has to offer and why it is strategically important.
Ukraine is the 2nd largest country in Europe by geographical area and with a population of over 40 million. Ukraine leads the ranks in Europe and the world in supplying base minerals and hydrocarbons:
- No 1. in Europe for proven recoverable reserves of uranium ores;
- No 2. in Europe for titanium ore reserves;
- No 2. in the world in terms of explored reserves of manganese ores (2.3 billion tons, or 12% of the world’s reserves);
- No 2. in Europe for mercury ore reserves;
- No 5. in the world for largest iron ore reserves (6.5 billion tons).
- No 1. largest exporter of sunflower and sunflower oil in the world;
- No 1. largest in bee production in Europe (75,000 tons) and No 5. in the world;
- No 4. largest producer and No 3. largest exporter of barley in the world;
- No 6. largest producer and No 4. largest exporter of corn in the world;
- No 4. largest producer of potatoes in the world;
- No 5. Largest exporter of wheat in the world.
- No 2. largest gas pipeline in Europe;
- No 2. largest gas pipeline in Europe;
- No 2. in Europe and No 7. in the world in terms of installed capacity of nuclear power plants;
- No 4. largest railway network in Europe (21,700 km);
- Operates 4 Nuclear Power Plants with a total of 15 reactors.
Currently, Ukraine supplies 8% of Europe’s gas annually. In the wake of war, this supply could be halted leaving Europe in heavy reliance on Russian gas which currently accounts for 30-40%of their gas supply.
There is no telling how this Russian invasion will end. But the stats above illustrates that Ukraine is an important economic region on the global stage and the outcome of this battle for sovereignty will undoubtedly affect global trade and create volatility across the global markets. We are clearly witnessing that currently.
Given the supply disruptions of energy resources such as oil and gas in particular, as well as agricultural products, it is likely to have an inflationary impact on prices. Although beneficial for Australia with regards to our energy and commodities sector, it creates further pressure on central banks to manage monetary tightening to reduce the risk of inflation whilst not strangling global growth.
However, the Russian/Ukranian conflict does wear down global and corporate confidence and will result in PMI’s coming down to reflect the corporate outlook. Inflation is likely to go up with confidence coming down. There is, off course, downside risks in the Euro and we have already seen this over the past few days with a flow on effect towards ‘safe haven’ currencies like the US Dollar and Swiss Franks.
Near term risks on equity and credit markets remain elevated. Uncertainty abounds as much is dependent on the direction the Russian invasion takes with regards to escalation or de-escalation and the timing of it all. Whilst the probability of the conflict spreading to NATO countries is extremely low, there is no guarantee that Putin will not retaliate if put in a tight spot. Let us hope that some common sense prevails, and this conflict is resolved quickly and with very few human lives lost.
Global growth has been robust and capital spending both from a corporate as well as government perspective has been supportive. Pent up production due to the disruption in supply chains from covid shutdowns and border closures is continuing to drive up growth as well as demand, especially in durable goods. The contagion affects of the Russian invasion, at this stage, to the rest of the world is somewhat low. For every $10 increase in the price of oil, global GDP reduces by 0.10%. Given that the global GDP growth numbers are above historic rates, this will have a subdued impact on global growth at this stage.
We believe in diversification across not only geographic regions globally, but also across industries, companies, and asset classes. We do this with fund managers who are “best of breed” and we also diversify across varying manager styles, strategies, processes, and expertise. We are conservative by nature and tend to hold assets based on strong fundamentals that tend to stand the test of time. We are meeting the fund managers we use in our portfolios frequently to ensure that they manage and maintain the mandate we have given them to responsibly manage our clients’ funds.
Now is not the time to panic but to stay the course and stick to the long-term strategic asset allocation based on individual risk profiles that we have meticulously structured with each of you over the many years of us managing your portfolio through both good times and bad.
As always, we continue to monitor the situation as it develops and will keep abreast of both risks as well as opportunities as they arise.
Stay calm, stay safe, and stay well!
“It’s in the nature of stock markets to go way down from time to time. There’s no system to avoid bad markets. You can’t do it unless you try to time the market, which is a seriously dumb thing to do. Conservative investing with steady savings without expecting miracles is the way to go.”
— Charlie Munger, Berkshire Hathaway