In the first of a two part series, Mark Clubb, Executive Chairman of TEAM plc, discusses the financial implications for investors following Russia’s invasion of Ukraine.
“This past two weeks rank up there as the crazier and saddest ones I’ve seen in my 40 years in the investment industry, and in my life.
This last couple of week’s news has been all about Ukraine and Russia. Our hearts, thoughts and prayers go goes out to those in Ukraine and others affected by the invasion. This is a terrible human tragedy and I encourage all to support any Ukrainian humanitarian aid efforts in the coming days. (Please see the postscript at the end of this article). We all hope and pray that this war can be resolved quickly.
I have my own view as to the best form of defence and/or punishment for this heinous crime. However, I refrain from straying outside the railway tracks of investing and seeking to manage our client’s money in a prudent and sensible manner.
Russian troops invaded Ukraine soil on multiple fronts. Planes and missiles attacked a number of cities, with the Ukrainian government is calling it “a full-scale attack from multiple directions.” Reports suggest the loss of life is already in the hundreds. I think we can all agree it is a terrible situation. It has also sent reverberations throughout the global financial system.
Let’s look at the investment impact of Russia’s attack.
Russia is the world’s third-largest oil producer at ~11% and supplies ~40% of Europe’s gas
Ukraine in itself is not a significant economy in the global context. It is about 0.2% of the world’s total. But Russia is a different story. Whilst the Russian domestic economy is only 2% of global GDP, the country is the world’s third-largest oil producer with circa 11% (the United States is the largest, followed by Saudi Arabia), and it is the world’s largest exporter of natural gas.
Russia is also a major producer of wheat (10% of global wheat production), aluminium, nickel, and other metals. Following the removal of Covid induced restrictions, oil, gas, and broader commodities are experiencing tight supplies and rising demand. Any disruptions to Russian output could drive up prices further, disproportionately punishing economies that rely heavily on Russian exports. In other words, Europe.
Russia supplies some 40% of Europe’s gas, and the EU also relies heavily on other commodity exports from Russia, such as nickel, wheat, coal, platinum, lumber and aluminium.
The United States is not exposed. Russia and Ukraine combined makeup far less than 1% of total U.S. imports and exports, and Russia’s status as a major natural gas exporter does not affect the U.S., given the U.S. is also a net exporter of natural gas.
In an optimistic scenario, reduced oil and gas flows from Russia could ultimately present an opportunity for U.S. oil and natural gas producers to extract and export more, becoming an even more influential player in global commodities markets.
Even so, investors tend to bid up the price of energy when geopolitical risks like the Ukraine situation emerge. The TEAM International Equity Fund has a 7% exposure to the energy sector for several months via industry leaders Total and Exxon. Both share prices have performed very well.
This Russian aggression and the declaration of war signals a major change to post-Cold War (Soviet Union) politics, and it could have devastating effects not only on Ukraine but also the wider Eastern European and Russian economies and peoples. Other former Soviet states could get drawn into the conflict from here.
Russia is just 3% of world GDP, but the conflict will add more supply chain disruption
The surprise is that the entire affair has not been a surprise, rather it has been a well telegraphed effort. For weeks U.S. President Biden warned, and there was plenty of definitive evidence provided by the build-up of Russian armed military forces.
Notwithstanding this, and as an economic matter, we still have serious economic challenges no matter how the Ukraine situation develops.
Russia is just 3% of world GDP, but the conflict will add more supply chain disruptions increasing the already-high inflation in Europe and the US have the potential to create a stagflationary economy or slowing economy. Why? Central Banks will raise interest rates to keep combating inflation and this will choke growth.
This is part of the reason the S&P 500 dipped into correction territory for the second time in a month. The Nasdaq technology company weighted index entered a full-blown bear market (down 20% from its high) last Thursday, but if you blinked you probably missed it. By the end of the day, it had rallied 7% from its lows to finish up more than 3%.
Russia’s invasion of Ukraine has increased fears among investors, escalated geopolitical tensions, and sent already high energy prices higher again. The oil price hit $100 a barrel for the first time in nearly eight years. Elsewhere, bonds, gold, and a handful of other commodities like wheat and nickel surged.
The headlines are scary and a lot investors have been and are selling pretty much anything and everything. These types of crazy times cause even the best and most experienced investors to question holding on to their investment portfolios. At TEAM we are experienced and disciplined. Times like these demonstrate the value of a collegiate team approach.
Join us tomorrow for the second part of this two-part series, when we will look at the options for investors and what the can do.
Billionaires have been much criticized for some time. The crazy world of Mr. Gates, Bezos and Musk. The last two particularly for their ambitions in space.
Well one of them, SpaceX founder Elon Musk has activated Starlink, his commercial internet network, in Ukraine, with ‘more terminals en route,’ the billionaire said. Musk’s SpaceX has thousands of Starlink satellites in orbit, which allow the company to beam broadband services around Earth, without the need for fibre-optic cables. The satellites could keep Ukraine online if its internet infrastructure is damaged by Russia’s attacks.
Musk’s move came in response to a plea by Ukraine’s First Vice Prime Minister and Minister of Digital Transformation Mykhailo Fedorov, who called for help on Saturday, as Ukraine fought off an invasion and sustained cyberattacks by Russian forces.
Whatever you think of this man, he is a colossus who has just pressed a button and changed the course of history. It’s now impossible for Russia to shut down the internet. This keeps President Zelenskyy connected to his people and keeps Ukrainians connected to the world.
It is also further evidence we are in the foothills of a Fourth Industrial Revolution. As Starlink state: “Using advanced satellites in a low orbit, Starlink enables video calls, online gaming, streaming, and other high data rate activities that historically have not been possible with satellite internet.”
“Starlink is ideally suited for areas where connectivity has been unreliable or completely unavailable,” the company added. “People across the globe are using Starlink to gain access to education, health services and even communications support during natural disasters’’.
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