What’s Going On?

End of Covid?

I had often wondered what would eventually knock the mainstream media’s endless coverage of the Covid pandemic off the front pages and hourly news bulletins. Never for a moment did I suspect the new story would centre around possible thermo-nuclear annihilation.

There’s a lot I want to say so please excuse the excessive use of bullet points.

Check!

Ever since March 2014, Putin had obviously planned his recent expansionary moves. He has bided his time until he felt his chances of success were at their highest. An attempt at annexation at some point was expected by many, but if you had continued to cry wolf for the last 8 years, by now nobody would be listening. Expected perhaps, but expected when exactly?

Long term investment must continue, because if we had spent the last 8 years on the sidelines we would have missed a huge amount of growth. Our moderate portfolio has added 79% over the period before the commencement of 2022, despite previous global investment worries. Since then values have fallen. For some this chain of events has been a stiff test of their resolve, more so than when Covid 19 took values about 1/3rd lower.

Great Timing?

How has Russia strengthened?

• Increased cyber warfare capabilities
• A very well versed trolling campaign and manipulation of all forms of social media
• Increasingly gained an acceptance of his ongoing military presence in the Eastern states of the Ukraine and the Crimea.
• Understood there is a reluctance to give any sort of reprimand following on from international spying and murder.
• Understood that global democratic elections can be rigged and domestically strong opponents can be threatened, suffer attempted murder and imprisonment, without the international community lifting a finger.
• Made a mockery of fair international sport through the systemic use of performance enhancing drugs.
• Recent moves towards the modernisation of currently ancient defence equipment
• Of course a global economy that has now become very dependent upon Russia’s natural resources.

Meanwhile in the West

• We have got to admit it, Western leaders have never shown more weakness.
• Western leaders have all been personally and professionally challenged by the Covid pandemic political crisis
• The West’s major fear of inflation and interest rate rises are contributing to unrest
• Defence spending has been falling since the Berlin Wall came down due to the reduced perceived threat from communist states. However until recently the UK has still had higher defence spending levels than Russia.
• The relationship between the US and Europe (including the UK) has worsened as the US pivoted towards China and the East.
• A European energy policy intent on a reduction of fossil fuels and nuclear power, becoming reliant upon gas imports.
• A green agenda first and foremost, without any thought of national security issues.
• The group think of left-leaning socialist supporters throughout the administrative fabric of western nations, encompassing education, public workers, health services, the media, the unions, the civil service. Even the security services!
• The pre-occupation by a few of the pronoun used to describe their self identification of gender, but the forced tolerance and acceptance of the many who individually are “cancelled” if they dare to exercise their powers of free speech.
• A closely run pair of elections battled out between the far left and the far right causing internal divisions nationally.

The Reality

First of all Russia today is not the super-power it was and global wars cost money. Russia is a relatively poor nation, about to be made poorer by huge international sanctions. The FCA has already been in contact asking that I divulge any information I may have about the Oligarchs that invest with us. Seriously! Corruption is rife and the black economy is huge, but in financial terms as measured by annual GDP (Gross Domestic Product)

• UK – Number 5 – $2.7 trillion
• Russia – Number 11 – $1.5 trillion (yes you read that right, just more than 1/2 of Old Blighty’s)
• USA – Number 1 – $20 trillion
• Germany, France & Italy are individually all larger than Russia in annual GDP terms.

There seems to be extreme unrest in many parts of Russia due to high levels of unemployment and the associated levels of poverty and alcohol abuse.

So even though we have been brought up to fear the Soviets, apart from their nuclear option, it would be far from a fair fight if all NATO nations combine. War doesn’t crash markets, it’s the uncertainty of an impending war that crashes markets.

This excursion is all about Putin trying to bring battle glory to a mostly un-interested Russian public. That and stealing control of 30% of global wheat production and 20% of corn production, making Russia a serious producer of the worlds food.

The Nord Stream 2 pipeline is also a consideration. Putin can’t currently get his almost $10 billion pipeline accepted and operational by German authorities. Squeezing exports via Ukraine would hopefully make Europe desperate for his gas by next winter, hence authorising his pipeline in any peace settlement.

Any Positives

Well there are always a few if you look closely enough.

• Putin’s invasion has given the West the kick up the backside it required. A universal enemy gives the divided nations of the West the reason to pull together
• There will undoubtedly be winners and losers. The FTSE has many Russian raw materials companies listed on it and so the index is going to be unstable for weeks to come. Look at today’s top faller Polymetal International, down by almost half. We have no Russian holdings within our portfolios, index trackers by definition must hold everything.
• With the US and the UK increasing interest rates and withdrawing financial stimulus there was the perception that asset prices like shares would struggle to maintain their past upward trajectory.
• The imminent interest rate rises to curb western consumption and reduce rising inflation have most likely now been deferred due to the prospect of global conflict. Liquidity can now remain higher which now remains a tailwind for share prices.
• Whilst the US and the UK have been in the lead with choking the flow of money, there is evidence that China, which has so far used the pandemic to slow down internal growth, is now splashing the cash to ensure the nations growth stays on target. Where ever money enters the system, the rise in global asset prices surely follows.
• There was already evidence that the high prices that were causing rising inflation have tempered consumer expenditure, which should bring prices back down – so reducing inflation.
• Raising interest rates too fast was the chief worry for investors as it usually leads to recession which is never great for the forward pricing of the share market. Perhaps Putin has helped bring this risk-off period to an early end.
• If we look at parallels from the past, in the overwhelming majority of years where the year started off with a steep drop, the year in fact ended higher.
• If you are feeling like you need to run for cover right now, please understand everybody else feels the same way. You will not find many an enthusiastic investor right now. Perversely all stock market growth periods begin from this point. It is termed capitulation. Ready to throw in your hand? Stop. This is exactly the time to look forward to the future. Remember nobody will be out there waving a flag stating that now is the time it is safe to get back into the investment markets again.

What’s the next step?

This is “Check!” in Putin’s global game of chess, but his aggression has not brought with it “Checkmate!” Instead we have seen an international global reaction and can probably expect a better financial reaction once markets have had a chance to digest the new facts.

The start of the year has been a shocker for investors at exactly the same time that we began to be filled with the optimism that the end of the global pandemic brought with it. We’ve suffered a collective dent in our short term valuations. (£10,000,000 between us!)

However we remain on the path we have chosen. We understand that we undergo shocks from time to time, but we remember that investing over a lifetime always brings far better results than not investing over a lifetime.

Please excuse the fact that I have given little reference to the facts listed above, but I have researched so much since the start of the year that I would never get this blog out if I had to go back and locate all the sources.

We are here if you need a one to one chat and look forward to a better investment future.