The Impact of the Russian Invasion on Investment Markets
The invasion of Ukraine has captured the headlines of the last few days. We are empathetic to the Ukrainians and their fight for their country and their freedoms. We believe this bold move by Russia has far-reaching implications on both the geopolitical and investment fronts.
Since 2014 Russia has been re-drawing its borders and/or regional control through a series of coup d’état and direct invasions as we have seen in Georgia, Crimea, and now Ukraine.
Russia is the world’s largest exporter of both natural gas and wheat. Russia provides 10% of the world’s copper exports and it produces a large amount of aluminum, nickel, platinum, and palladium. It is a country with deep and important natural resources. Russia over many years has positioned itself as a vital exporter of natural resources to Europe and China.
Energy is in short supply and Russia knows it. Inventories of oil and gas across the globe are below average and spare capacity is tight. The United States oil inventory is well below its five-year average. In other words, any sanctions on Russian oil exports will deeply hurt the global economy.
For Germany and Europe, the issue is even more acute. Without Russian gas, their industrial base would be severely hampered and could send Europe into a deep recession. Further, while some countries such as the United Kingdom and Poland have natural gas terminals and could receive natural gas from alternate suppliers, the infrastructure is not in place to distribute it to the rest of Europe and it will require time to build that distribution infrastructure.
So, with this dependence on Russian natural gas, it is unlikely we will see any severe sanctions on Russia’s energy exports.
Prior to the current events in Ukraine, tight energy supplies were moving energy prices and more broadly commodities higher.
We currently hold energy and have been gradually expanding both our energy positions and our commodity positions.
The Russian invasion of Ukraine may also impact Federal Reserve policy. As Europe walks a tenuous tightrope of economic uncertainty, it is likely that the U.S. Federal Reserve and global central banks will proceed more cautiously. Before Russia invaded Ukraine, the primary uncertainty for investment markets was the shift in central bank policy from quantitative easing to quantitative tightening. Would the Federal Reserve and other central banks across the globe aggressively raise interest rates and aggressively reduce the size of their balance sheets to fight off inflation?
While the Federal Reserve needs to remove much of the Covid-related accommodation, now the markets expect a more tempered approach due to the uncertainty of the geopolitical environment. As the chart to the right illustrates, the more aggressive the Federal Reserve is in raising short-term interest rates, the worse it is for the equity markets. Conversely, if they take a slower more moderate approach equity markets and, for that matter, bond markets do much better.
This change in expectation from fast tightening to moderate tightening could actually help stabilize investment markets.
Lastly, Russia is staging both an on-ground attack and cyber warfare. This is a first. It is also likely a preview of what we will see in the future. Cybersecurity has never been more critical. We have maintained positions in cybersecurity and related sectors for several years now. Current events only emphasize the need to harden U.S. infrastructure from cyber warfare and the importance of this long-term investment theme.
As always, we remain alert to any changes in market conditions and will act proactively to protect and grow your wealth as conditions evolve.
The Riggs’ Report is written and published by Riggs Asset Management Company, Inc. The information contained in this Report is for informational purposes only and should not be construed as investment advice.
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