Russia, Ukraine, and the Markets

Firstly, across all investment portfolios that we manage, we have no direct investments in companies located in either the Ukraine or Russia. That said, economic ramifications will reverberate around the globe, so it is a priority for HWM to stay apprised and analyze the current events as they effect securities everywhere.

The US and EU along with other Western powers in the financial world have placed severe sanctions on the Russian economy and some of its wealthy oligarchs. Even the Swiss jumped in and announced they will be freezing assets. The major economic development so far has been the cutting off of Russian banks from SWIFT, the international banking communication system. US Intelligence states that Putin has been building a war chest since 2014 while reducing national debt. Their reserves currently stand at roughly $640 billion in foreign assets. Nevertheless, war is straining the Russian economy and citizens are already feeling the pain in terms of inflation and cross boarder capital restrictions. The ruble tumbled over 30% and had its largest one day drop in history on Monday. In order to combat inflation and stymie further erosion of the currency, the Russian central bank pushed interest rates up to 20% from 9.5%. This along with SWIFT actions have caused Sperbank (Russia’s largest bank) and other Russian banks serious liquidity issues and is pushing them to the brink of failure. It is difficult to determine just how much exposure key financial entities have to Russian banks and assets, but it has been reported that for S&P 500 companies only 0.1% of their sales come from Russian customers. It is also important to point out that paying for oil and gas is currently exempt from the SWIFT sanctions. Reasons being, Western Europe needs its energy and equally if not more importantly commodity markets (prices and availability) in general must remain relatively stable lest the entire industrial-financial complex experience severe shocks.

What does this mean for our market positioning? Let’s examine three scenarios: the bad, the terrible, and the most likely.

In the bad scenario, fighting draws out longer, more foreign aid is poured into Ukraine, Putin ramps up nuclear threat language, China increases support and even advances it war aims in Taiwan, and supply chains get constrained. In the terrible scenario, both Russia and China engage in full scale war in their theatres, Russia initiates preparations to deploy nuclear missiles aimed at any country that threatens its advances in Ukraine. Runs on banks and global panic ensues. Hopefully those two scenarios don’t play out. In the most likely (and better) scenario, battling continues, Russia surrounds and takes Kyiv, installs a pro-Russian government, and refrains from further hostilities for the time being. In the US, talk returns to inflation and Fed.

In all three of these cases, it stands to reason that the Fed would be less aggressive going forward. But regardless of Fed actions we would look to raise some cash in the first scenario, and aggressively in the second (looking for stores of value like gold). In the meantime, we are still cautiously optimistic and see risk assets (stocks) as better investment options than cash. We like growth over value in the long run but could see value continue to outperform in the near-term as investors seek the comfort of dividends.