Another Free Market Update
It’s been a wild week since our last newsletter with war escalating in Europe, Energy and Commodity markets going haywire, Russia becoming effectively uninvestable (not only for ethical reasons but physically impossible due to sanctions), currency markets showing volatility and who can forget the flooding we are seeing across the East Coast.
We just want to say that we hope everyone is staying safe with the floods and if there is anything that we can do to help during this time please let us know. As painful as it is to lose possessions, your home or business assets, none of the above are worth risking your life for. Please stay safe.
As anyone who has seen the news since our last letter headlines have been dominated by the ongoing conflict between Russia and the Ukraine. Throughout this terrible situation we have continued to be amazed by the level of leadership and bravery that has been shown by Ukrainian President Volodymyr Zelenskyy (who believe it or not is a former TV comedian). While many expected The Ukraine to fold in less than three days the fight shown has been immense.
It has been estimated that the death toll has already reached the 1000’s and unfortunately it appears that this number is likely to increase over the coming days. It has been reported that Russian forces have managed to capture the city of Kherson the first major city to fall so far.
Russian troops are currently surrounding the largest nuclear reactor in the Ukraine however the worlds largest atomic energy body, as well as external governments, are requesting that Russian forces allow the plants operators to make decisions free of undue pressure and avoid combat in the area to avoid a potential safety incident.
On the upside there have been initial peace talks between the two nations, while unsuccessful so far, do create an opportunity for this conflict to end.
Moving to financial market implications of this conflict the most dramatic has been the complete closure of the Russian Stock market for the past 3 days. Additionally, as sanctions continue to be enforced, many brokers are not allowing clients to either move money into Rubles or purchase Russian equities. The most dramatic example of this has been the MSCI deciding to completely remove all exposure to Russia across it’s various Indices, including the very popular Emerging Markets Index. Notably shares in Russia’s biggest bank Sberbank, which is traded on the London Stock Exchange, have collapsed from $16.12 at the start of the year to be trading at $0.01 at last price.
Within the oil market despite supply being tight globally Russian oil exporters are unable to find a buyer for their supply despite benchmark prices soaring to above $110 USD a barrel and the Russian suppliers offering an immense discount. The longer this goes on it is likely that there will continue to be no bids for commodities coming out of Russia despite constrained supply. With a significant portion of European energy supply coming from Russia the prices of energy related commodities have soared over the past week as nations look to find replacement sources of oil, gas, coal etc. The most dramatic move so far can be seen in the price of Newcastle Coal which is trading at over $400 for this months contracts, $430 for April deliveries. For perspective these contracts were trading at incredibly elevated levels of $200 on merely Friday. A doubling of costs within 4 days.
Local Market: It may come of a surprise to learn that since last Friday the ASX 200 is up 2.4% with energy related names leading the rally. Woodside Petroleum is up 12.5%, Whitehaven Coal is 20.56%, Santos is up 12.3% and leading the charge has been Yancoal with a whopping 44.5% rally over the week (although it did report during this period and announced a huge dividend).
One area that may surprise you with the recent performance has been the Cyber Security sector. Following reports from Microsoft of a widespread Russian hacking effort the sector has performed incredibly strongly with our preferred ETF in the sector HACK rallying over 6.1% in the past 5 days.
Overall, our market does not appear to be overly concerned with the situation in the Ukraine with focus being more upon interest rates, the performance of the economy and individual company performance. Regarding interest rates, it has come as no surprise to us that the RBA has decided to leave rates the same this month as uncertainty over the Ukraine situation has provided the RBA further reasons not to act yet. In the US, the market has now completely disregarded the idea of a 50 Basis Point (BP) rise at the next Fed meeting and Jerome Powell has announced his preference for a 25 BP rise.
As we have now completed reporting season a quick synopsis of our thoughts can be found below:
1.Companies have mostly reported well despite another Covid interrupted year for many businesses.
2.Working out the normalization of earnings and profits compared to pre Covid levels is difficult. The main question we are asking is have we had a long-term thematic shift or were certain businesses just immense beneficiaries from the disruption.
3. Dividends have been strong particularly across the resources sector with many companies we hold surpassing our expectations for dividends.
4. Interest rates are likely to rise, and it appears to a be prudent move to hold exposure to sectors that will benefit from these rate rises.
5.Supply chain disruption is being felt across the market and inflationary pressures are present
6.The banking sector has largely fully recovered however in the most recent half it was clear that Net Interest Margins are being reduced.