Discretionary Investment Management | Ravenscroft Group | David Le Cornu
03 May 22

Weekly update - The week that was

This week’s update comes from David Le Cornu, in our Jersey discretionary investment team.

It was an interesting week in investment markets and I am spoilt by the choice of things to write about. Elon Musk’s bid for Twitter, collapsing mortgage applications in America (44.5% lower than 12-month average), Chinese Covid lockdowns (cases rising in 20 provinces that collectively account for three-quarters of China’s GDP) and their impact on supply chains, the slump in the Japanese Yen or the many events in Europe / Russia / Ukraine all merit comment.

Luckily for you readers we have guidelines about the number of words I can use in the Ravenscroft weekly update, so, I can’t offer thoughts on all five.

On balance, so much has happened in relation to Europe / Russia / Ukraine that I have decided to summarise some of events of the last week in case you missed them, and to offer some brief personal thoughts on events and the implications for investment markets.

Europe / Russia / Ukraine

  • Sergei Lavrov Russia’s Foreign Minister last week accused NATO of being engaged in a war with Russia by proxy and arming that proxy then warned of the possible use of nuclear weapons and risk of escalation with World War III being possible.
  • EU issued guidance to companies not to bend to Russia’s demand for payment for oil and gas in roubles.
  • Gas supplies to Poland and Bulgaria were interrupted as they have refused Russian demands to pay in roubles. Gazprom also warned the two countries, which are both transit countries for gas, that if they syphon off gas which is meant for other destinations then it will further reduce transit flows. 
  • Germany staged a U-turn and pledged military support to Ukraine. It has also stated it will compensate Eastern European countries that sent Soviet-made arms to Ukraine with western kit from its own stock. It also announced the Ukraine orders and Germany pays scheme whereby Ukraine can order military weapons directly from German manufacturers and Germany will pay for them.
  • German Economics Minister Robert Habeck advised Germany is close to independence from Russian oil imports and an oil embargo on Russia has become manageable as their oil dependency has reduced from 35% before the war to 12% within an eight-week period.
  • The European Commission has proposed suspending import duties on all Ukrainian exports to the EU for one year. The proposal would also see the suspension for one year of all EU anti-dumping and safeguard measures in place on Ukrainian steel exports.
  • UN Secretary General António Guterres arrived in Kyiv on Wednesday evening for talks with President Volodymyr Zelensky and Foreign Minister Dmytro Kuleba.

Personal thoughts

We have now entered the third month of this military conflict. Russian military aggression continues unabated, but Russia is complaining that some limited military action has occurred within Russia. Ukraine has wisely not confirmed or claimed responsibility for such action as it would inevitably prompt Russia to take even more aggressive action.

Putin is looking for some way to claim victory and with 9th May having equal importance in the Russian calendar as it has in Channel Island calendars, we can expect increased aggression in the run up to Victory Day / Liberation Day. Unless Putin can deliver a plausible victory (seems unlikely) or there is regime change from within (also seems unlikely) the military conflict has the potential to run for many more months.

NATO is treading a fine line trying not to become directly embroiled in the military conflict, but gift ever increasing numbers of weapons and amounts of training to Ukrainian soldiers. This is clearly aggravating Putin and prompting the threats of escalation. Germany appears to have been forced to join in the gifting of military arms. Interestingly, the 50+ Gepard anti-aircraft cannon tanks that they are supplying were phased out in 2010, so, the weapons need to be refurbished before the tanks are sent to Ukraine

Financial sanctions / actions are escalating with NATO seeking ever more creative ways to financially punish Russia and help Ukraine.

Europe is trying to work out how it can wean itself off Russian oil and gas. Despite Robert Habeck’s words, it is hard to see any way that Germany and a number of other European countries can quickly turn the Russian oil and gas taps off. Whilst Europe and NATO are showing a united front, you must ask whether it will hold if Moscow abruptly halts the flow of its natural gas to Germany and other EU economies. 100% of GDP is dependent on energy, and unless alternative supplies can be found, GDP will collapse. European citizens would face energy shortages and may not be as supportive of present actions if they are without heat and light and their employers have to reduce their hours and pay as there isn’t the energy required to power the factory they work in. Europe could find itself grappling with a new economic crisis that could pose a threat to the European Union and the Euro’s survival or it could force ever closer European Union if financial support programmes need to be funded and delivered on a European rather than country basis.

It is clear that the war in Ukraine continues to disrupt an already disrupted world and it seems likely it will continue for many months. I believe the risk of NATO / Europe accidentally crossing an unmarked line and becoming militarily involved is rising daily.

Further bouts of volatility in investment markets seem likely over coming months and may present opportunities for those who are bold enough and sufficiently fleet of foot to trade the volatility.  For longer term asset allocators such as myself, a defensive mindset remains appropriate for now as does a lot of hard work researching and monitoring the investments that we want to buy when some of the risk we presently face abates. 

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