Market Bulletin: Russia Ukraine Conflict (audio included)

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Market Bulletin: Russia Ukraine Conflict (audio included)

February 2022

Well, it finally happened. After weeks of posturing and speculation, Russia invaded Ukraine before the sun rose over the former Soviet Union yesterday morning. Possibly the only good thing about yesterday morning's event is that we can move on from wondering “if” and “when” to“what now”? What does this mean for countries and companies with vested interests in Russia or Ukraine around the world? What about for the far-away investor that just watched the DOW index open down more than 2% yesterday? And will this have an impact on those European cookies that I like to pick up at HEB? (Spoiler alert: it will).

Let me start by saying that long-term and far-reaching effects will depend on three things: how the invasion of Ukraine plays out, the level of sanctions that are imposed, and the resulting adaptive responses from import-dependent countries. Hundreds of models have been created in recent weeks, forecasting from the mildest to the most severe impacts. While there is no universal truth about the long-term anticipated impacts, there are several things we can anticipate short-term and several factors that we want to elaborate on to help you understand what the potential economic impacts may be.

So, how important is Russia in the global economy? The short answer is not very. One Harvard economist went as far as to call them “incredibly unimportant” and liken them to a big gas station. There are several European and African countries with significant reliance on Russian and Ukrainian resources that can expect substantial short term price hikes and supply disruptions on five key commodities: palladium, natural gas, oil, wheat, and aluminum, which together represent components in everything from car exhausts to cell phones to HEB European cookies. Bottom Line: We won’t be immune to disruptions and increased inflation, but we shouldn’t be running to fill up our gas cans and pantries.

Commodity prices

The US and other NATO allies have already helped blunt the impact of the anticipated energy and supply chain disruptions to Europe by increasing their shipments of liquified natural gas and other key commodities. In turn, this will drive-up gas prices here, as you have likely already noticed. Increased supplies from other oil-rich countries such as Qatar are expected to lessen the burden on the US in time.

If the pandemic has taught us anything, it is that a global supply chain system is vulnerable, and in the long term, we should expect to see countries adapting to supply challenges by diversifying their energy sources to blunt the impact of the main resources Russia has to offer.

While we can expect fluctuations in the global economy as a response to the events of this morning, they are just that –reactions. Say it with me folks –“for every action, there is an equal and opposite reaction.”If you knew when that equal and opposite reaction would occur, you wouldn’t need us to manage your money. For all those without a crystal ball, I’ll take this opportunity to again remind you why we don’t time the market.

What we are doing is leaning into our institutional investment managers. They view this volatility as an opportunity and are positioning your portfolios accordingly. We have reduced exposure to interest-sensitive bonds. We have increased our exposure to stocks of companies with modest dividends, low price-to-earnings ratios, and outstanding growth potential. We are avoiding averages, i.e., index investing, and are especially favoring stock selection based on fundamentals.

We hope this has been informative. We look forward to hearing from you and answering any questions you may have.

I’m Anders Storvik and this is the Brent Forrest & Associates’ audio email.