WHAT WAR MEANS FOR INVESTORS
Russia’s invasion of Ukraine will affect economies and industries, with major implications for SA, writes
We’ve crossed the Rouble-con. The relationship between the West and Russia probably won’t be the same again for decades, if ever.
Some punters may even miss Covid. Though it hurt a lot of people along the way and many were frustrated at the ridiculous behaviour of the SA government (and many others), it seemed far less severe than the anguish caused for so many people by Russia’s invasion of Ukraine.
Conflicts are nothing new. There are many other examples of murder committed in the name of war, including horrors inflicted by the US. All the superpowers have blood on their hands one way or another. The difference with this one is that it carries the risk of an extinction event.
The other difference is that the mainstream media did a complete 180° from its ongoing coverage of Covid to focus on this conflict instead. In that process, we’ve seen a polarisation of the world’s access to
information. Western news and information platforms have been forced out of Russia, a win for any authoritarian government that loves to control the information its people are receiving.
We live in a time when information can spread faster than ever before. Misinformation can (and does) do the same, so we need to keep our wits about us and our scepticism high.
The emotional side of the argument has no bearing on an objective analysis of the likely impacts of this geopolitical shift
on economies and industries. Our government has taken a relatively neutral stance on the matter, upsetting the West in the process. Given SA’s historical and current ties with Russia (Brics, anyone?), it’s not a hugely surprising approach. Moral arguments aside, maintaining a position of neutrality and calling for a resolution to the conflict is probably helpful for SA overall.
Leaving aside (but certainly not trivialising) the deeply disturbing human cost of this invasion, our job as investors and financial strategists is to form a view on what this could mean for the markets.
“The calls for renewable energy will probably be louder than ever before, with oil and gas price charts as easy evidence in any such debate
There are key questions that need to and will be asked by many governments, especially those in Europe.
Instead of always handing the microphone (or megaphone) to Greta, other views may need to be considered. Investment in nonrenewable energy cannot just disappear without putting Europeans at significant risk. Conversely, the calls for renewable energy will probably be louder than ever before, with oil and gas price charts as easy evidence in any such debate.
Beyond an inevitable shift in energy policies, there’s a broader story around the dollar as the world’s reserve currency. Despite unprecedented use of the money printer by Federal Reserve chair Jerome Powell, the dollar is trading at similar levels to the end of 2019, as measured by the US dollar index (DXY) — the value of the dollar against a basket of foreign currencies. This is a complex topic with many variables, one of which is the world’s unwavering belief in the power of the greenback.
Sanctions on Russia have affected the country’s access to its foreign reserves. Core to the thesis of even having foreign reserves is that countries can access them in a time of emergency. These are the ultimate rainy day funds, so not being able to use them on a rainy day isn’t useful. It’s not like gold is any better — at the time of writing, the US was considering legislation aimed at closing a loophole linked to Russia’s use of gold.
Of course, there’s more to foreign reserves than just the benefit of having them in a time of war. These reserves are critical in any situation where a country’s currency rapidly depreciates, so demand for safe-haven assets isn’t going to disappear just because a country can be blocked from accessing them during a period of significant military action.
Gold is unlikely to become worthless if Russia is blocked from using its gold reserves. The dollar won’t suddenly depreciate and trade more in line with its inflation and federal debt realities just because of sanctions.
The important point is that some of the arguments for these assets have been weakened by the sanctions. With China holding the world’s largest dollar foreign currency reserve (well over $3-trillion), this is a macroeconomic phenomenon to keep an eye on.
Is bitcoin a potential winner in this shift? It all comes down to whether bitcoin could be accessed by a government at a time when access to dollar and gold reserves may be prevented. The banning of major Russian banks from the Swift system is also relevant here, as there may be a transactional argument in favour of cryptocurrencies.
Bitcoin’s pricing was extremely volatile (what else is new?) in the first two weeks of the invasion, spiking from about $38,000 to almost $44,500 before returning to below $39,000. Though that doesn’t sound like much of a safe haven, the argument would be based on the ability to trade the coins in a time of desperation, not the levels of volatility at the time.
Linked to this, there are questions being asked about property ownership rights. Russian oligarchs are having their assets seized in other countries, suffering substantial financial losses along the way. If London is no longer the destination of choice for wealthy Russians, where will their money go? China? Brazil? How about right here in SA?
Again, this is an objective discussion, so it doesn’t matter whether you feel warm and fuzzy about this potential outcome or nauseous at the thought of Russian wealth flowing into wine farms. It’s a distinct possibility that our neutral position in this conflict could attract investment from wealthy Russians. Will Clifton become the new Chelsea?
In the tech sector, US tech companies (and many others) have had to pull back from Russia. It seems likely that Russia could be the new China, utilising social media and payment apps that are different to those found in the West. Tencent in China is a perfect example of this.
Russia’s share of global GDP is more than 3%, so this isn’t immaterial, especially when growth outside of the US is a strategic priority for many of the leading tech companies that have saturated their domestic market.
The other critical theme is around computer chips. The US is reliant on Taiwan Semiconductor Manufacturing Co (TSMC). The clue is in the name — TSMC doesn’t have its head office in California. With the ever-present risk of a Chi
Russian oligarchs are having their assets seized in other countries, suffering substantial financial losses along the way
nese invasion of Taiwan, the US may look to bring the supply chain home. This could benefit US chip manufacturers and drive investment in that sector.
The largest shift may come in the cloud computing industry. Alibaba Cloud is a viable competitor to Microsoft and Amazon. Unsurprisingly, it enjoys far greater market share in its home market than in global markets. East-West distrust of data privacy is nothing new and will only be heightened by latest developments.
Over time, Alibaba may be a beneficiary of the retreat of US tech companies from Russia. This may not be enough to save those who have suffered substantial value destruction in Alibaba (like me), as the market sentiment towards Chinese stocks has worsened through the crisis, taking Naspers and Prosus into the pit of despair. There’s also a lot of noise around the listings of Chinese companies in the US, a problem that existed long before Russian President Vladimir Putin sent tanks into Ukraine.
On the topic of weapons, the demand tailwind for defence companies such as Lockheed Martin (in the US) and BAE Systems (in the UK) is significant. In a rare display of alignment, Democrats and Republicans recently agreed to increase the US’s defence budget. Spending on defence as a percentage of GDP is likely to increase among European nations as well, a move which I suspect will find public support based on the horrors in Ukraine.
From an SA perspective, we should be pleased to note that Russia is the world’s secondlargest platinum group metals (PGM) supplier. If European car manufacturers refuse to trade with Russia, this can only be a net positive for PGM prices and SA exports.
Also from an SA perspective, we should be worried that Ukraine is a huge exporter of agricultural products to Africa (primarily wheat and maize). Price action has been significant in soft commodities. Coupled with the vastly higher price of oil, the risk to food inflation is burning bright red. At an extreme, food inflation can lead to “Arab Spring” uprisings. At the very least, pressure on wages will be high and the risk of associated labour unrest is significant.
SA is well placed to take advantage of a commodity boom. The rand has held up remarkably well during the invasion, as the world recognises our ongoing attractiveness as an emerging market. Of course, we shoot ourselves in the foot all the time with our state-owned enterprises, especially Eskom.
Another major risk factor is Transnet. We cannot take advantage of higher global coal prices if we cannot achieve the required throughput of exports. Every coal company in this country is upset with Transnet and with good reason. The situation has deteriorated to the point where Mozambique is picking up a lot of export traffic, which Grindrod shareholders certainly aren’t complaining about.
But the biggest risk of all is a disaster we have experienced before — extensive and potentially violent labour unrest in the mining sector.
At exactly the same time that mines will be making super-profits, workers will be struggling with food and transport inflation. That’s a dangerous combination.
The rand has held up remarkably well during the invasion, as the world recognises our ongoing attractiveness as an emerging market