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Citation - First Quarter 2022



Chief Investment Officer
Estimated reading time: 3 minutes 46 seconds read

It always surprises me how unsympathetic, harsh and callous financial markets seem to be during periods of global turmoil. In the middle of the last quarter the world was hurled into a human tragedy in the form of a war in Europe, when Russia invaded Ukraine. The wanton destruction and human despair that emanates from this situation beggars belief. It amazes me that the West’s major responses are limited to sanctions against Russia, and providing Ukraine with weapons they’re not trained to use.

We have had to witness, over global news networks, how thousands of people have been killed and millions left homeless and destitute. I ask, is this the best the world can do to defend innocent civilians against military brutality? Is Ukraine’s sovereignty sacrificed at the altar of political correctness? It’s exactly then, that I’m reminded, again, that financial markets are in fact only discounting machines of future economic circumstances and not reflections of daily news. That’s exactly why financial analysts are taught to ‘look through the noise’ and to discard emotions from investment decision-making. In fact, global turmoil presents as a multitude of investment opportunities and risks.

The major economic themes that drove the markets prior to the war, have only been exacerbated by it. Global growth was slowing down, and now it is doing so more rapidly. Inflation was on the rise and now it has reached record highs. Central Banks vowed to raise interest rates to combat inflation and now they have accelerated their pace. These cyclical factors will, however, pass over time and are no different to any other period of turmoil before. What is different, though, is that this war marks the end of globalisation as we know it and have experienced over the last three decades. It has also completely obliterates commodity supply chains and agreements. A clear rift is developing between Russia, China and most of the East on the one hand, and Europe and the United States or broadly speaking NATO countries on the other.

Previously neutral countries like Finland and Sweden have now been forced to align themselves with the West in a scramble for security, as Russia’s actions have become totally unpredictable. Just about every commodity on the planet has been affected by this sudden fissure in global trade. Agricultural commodities have suffered tremendously, as Ukraine’s supply of wheat and sunflowers disappeared from the market entirely. Energy and metals markets are in total disarray, as sanctions against Russia imply enormous changes. All these shifts have led to shortages that will take time to overcome and result in higher prices and inflation.

The most important development, however, from a financial markets’ perspective, has been Russia’s move to link the Russian ruble to gold. Russia announced that it will honour all debt repayments, but in rubles and that all their commodity exports should be paid for in rubles. Also, that the value of the ruble will, until further notice, be a fixed amount linked to gold. This is a phenomenal move by Russia, as it essentially creates a commodity-backed currency anchored in a commodity that they produce a large proportion of the world’s supply of. So, after losing more than half its value at the onset of the war, the ruble has entirely returned to its pre-war level against the dollar. That is truly astounding for a country that will experience a double-digit contraction of economic growth, lose half its global reserves, face sanctions from half the world, default on its global debt, and face decades of post-war reparation costs. This turnaround for the ruble has immense repercussions for other emerging markets and commodity producing exporters, and the next few years will determine how new supply chains are set up along with the monetary arrangements attached to them. Meanwhile China, is sitting quietly on the side lines, contemplating its action against Taiwan.

There are many uncertainties and changes taking place around the world, but as financial analysts we are once again reminded to remain unemotional, stick to the actual numbers, and not get influenced by the current sentiments around current events. As Jerry Maguire famously shouted out, in the movie of the same name, “Show me the money!”, so too do we shout, “Show us the earnings!”. And on the back of that, the world isn’t remotely as negative a place as that which we see on CNN.

I hope you enjoy this edition of the Citation.