Thoughts on Russia-Ukraine, Asset Class Implications by Paul Gambles
After much tension, Russia finally launched special operations in Ukraine, resulting in unprecedented sanctions and penalties from the west and a heightening of geopolitical tension – how will all this change the investment landscape?
We thought that it was all playing out pretty much along the lines that we published a paper in January telling everybody to be aware of all the risks in Ukraine.
And initially it seemed that things were going along with that. But then we had after the first wave of sanctions from the west, we then had a second wave of sanction, which I think probably, a little bit of a surprise, just the sheer four a bit, and things like cutting Russia off from the swift, payment messaging system, things liken confiscating, Russian reserves.
Concerns around how higher energy prices could drive up inflation more broadly, What will we see for the next move for Fed , any risk of “stagflation”?
That potentially is a bit of a game changer.
So I think what we have to do is try and break things down into kind of first order reactions from the events with in, and also a kind of systemic reactions that there’s once all of this finally resolves itself in some way or another, then that won’t be the end of it.
There’ll be a lot of longer-term lingering implications. That’ll be potentially serious fo the shape of the financial system or many years to come. This could be a really a game changing event over the longer term, but it’ll also very significant volatile in the short term.
I think is interesting from a scenario point of view is that most people are focusing on the idea of will the conflict, will it end quickly, or will it become prolonged? We don’t know that, but I don’t think that is the important question.
We think it’s more to do with if the conflict gets resolved. Well, what are the terms of that resolution, if the conflict drags on, well, what are the terms of the conflict? These are going to the things that really define what happens from here on, will there be a change where, instead of having essentially a financial world where us dollar is the reserve currency, where pretty much everything, revolves around us capital markets, will there be a real change in that?
There’s a very significant risk that actually what we’re seeing now could end up creating a very big shift away from us centric world into a multi-polar world that actually you everybody’s focusing on the damage to Russia. And there is a lot of damage to the Russian economy.
And obviously also the most important thing here is there are big losses of life, Ukrainian lives, Russian lives being lost during this conflict, but in terms of scenarios for more significant financial and economic, one of the things we have to look at and Michael Hudson who’s is really eminent economist, probably one of the most intelligent people on the planet wrote a paper saying that actually this could be the beginning of the end of the us dollar dominated, us capital market dominated system.
And if so, that would be, you know, the biggest change in, in anybody’s lifetime, from a financial and economic point of view.
Concerns about higher in price could dry up the inflations more broadly, what would we see for the next move?
that’s another interesting point that I think a lot of people are again not fully understanding.
We’ve seen, much higher oil prices. We’ve seen much higher, commodity prices generally, and that’s because what we’re really experiencing now, what we’re living through is another version of a supply shock for us all the inflation that we’ve seen over the last year or so has really been about supply. It’s been about disruptions to supply. It’s not been about a sudden increase in demand in most areas, demand is lower than it was going into the pandemic.
So, we had a weak economy, but we have really disrupted supply lines. And the difficulty I think is that policy makers, particularly in the states have really backed themselves into a corner by saying that they’re going to deal with this supply shop driven inflation by applying the kind of remedies that would only work if at all, to demand, demand driven inflation.
We’ve got a federal reserve; we’ve got a treasury in the states that’s committed to really tightening in a way that’s going to potentially hurt economic growth. And we certainly see the risk to economic growth as being very severe, but also in a way that could cause real problems in capital markets. We’re already seeing that there’s much less liquidity floating around, and this is a time when policy makers should be ready. They should be alert to go and introduce huge amounts of liquidity into the markets.
The point is that there are really systemic risks out there where, businesses, the financial sector are really at risk because of the lack of liquidity.
So, all these things are they’re alarming. These are huge risks that we face that was problems before the conflict happened in Ukraine. And the conflict in Ukraine has potentially changed them. Certainly, the response to the conflict and the policy response to the conflict has changed those from being problems into becoming real systemic risks.
What can we expect from commodities? How will “Asset Classes” behave? (Eg. Gold, Fix Income, Equity, Commodities)
What we must do is look at the different scenarios and see which are the most plausible and try and understand what that means for different asset classes. That’s how we approach investing.
We look at scenarios and try and model those, but right now, instead of a sort of manageable range of scenarios, it’s almost as if anything is possible. The consequences of some of the things that are possible are extreme right now, we could be in a market situation for some asset classes or some businesses, or some sectors, or even whole economy, or whole capital markets we could be in at a level of risk that we just haven’t seen in our lifetimes.
I think for every sector, we must look at how real those risks are, how quickly they can actually eventuate and what investors can do to protect themselves against those. And, there have been some fairly good ways to mitigate that.
When this crisis started the price of gold miners was incredibly attractive and gold miners were an obvious way to hedge a lot of these geopolitical risks. The problem that we have now is, gold miners, which we were very overweight. We were holding a lot of gold miners for our clients. These have really shut up in value so much that now, instead of being a good hedge and being good value, they’re now incredibly expensive and they’ve become a risk in themselves.
The idea that gold miners that we’re trading at less. And, if we look at the ETF, which we prefer, we’re trading less than $30 and now, you know, trading over $43. That’s an extreme move in a, in a few weeks’ time, and it could easily retrace back down again.
And all these systemic risks that I mentioned earlier, they could also affect that. So, you know, what we’ve got to do is be extremely cautious because we just don’t know what the outcomes are going to be. And we’ve gotten try and understand how risks are changing as say, gold miners really weren’t very risky when they were below $30 at the start of this crisis at $43 with the fact that, now all these systemic risks, which could even affect gold miners themselves. It’s a very different scenario. So, we must react to that, and we’ve got to use a mix of asset classes in a way that will actually try and protect clients in just about every single scenario.
How to build a resilient portfolio in this year?
The first thing you have to do is try to identify the range of possible risks. In this environment, almost anything can happen. It’s not about will the conflict finish quickly. Will it take a long time? As, as I said, it’s about the terms that the conflict is conducted on the reactions,
So trying to understand all of those and understand what the implications are for all of those, that has to be the starting point.
What we have to do is look at all the scenarios and try and make sure that clients aren’t exposed portfolios, aren’t exposed to those worst possible outcomes. We have to try to mitigate those risks and hedge those risk, prevent the bad outcomes. That might mean that the portfolio returns are gonna be a little bit lower because actually it’s really like buying insurance for your portfolio.
Nobody should be aggressive chasing a particular scenario, particular outcome. They shouldn’t be trying to get the highest returns unless they’re willing to lose everything because in this kind of environment, as I say, anything could happen.
Right now it’s really shining a light on who does have good risk management and who doesn’t and portfolios that have good risk management and that try to prevent all the possible bad outcomes. Those are the ones that will be resilient.
Disclaimer: The above information has not been independently verified. This investment brief is given for information only and does not represent an investment proposal, recommendation or advice to invest in the shares or business of the subject company. Additional information shall be made available to interested parties subject to the execution of the requisite confidentiality undertakings. The financial information, actual and/or forecast, provide herein is based on management representation.
