Written by Cormac Nevin.
As the war in Ukraine entered its second week, the impact of a prolonged conflict began to take its toll on markets. The MSCI All Country World Index of global equities was down -1.3% last week, however the sell-off was intensely concentrated in Europe as the MSCI Europe Ex-UK Index returned -8.9%, while the FTSE All Share Index of UK stocks was down -6.7%. Other markets such as Japanese and US equities were assisted by a weakening GBP and recorded a small positive return. Yet again, these events highlight the critical importance of diversification.
The second and third order effects of the conflict are now becoming evident in international commodity markets and will soon become painfully so to consumers. As of today, oil has surged to roughly $130 per barrel while UK natural gas futures have gone parabolic and have far exceeded the price spike in December of last year. Another troubling dimension is the impact on food and fertiliser prices, given Russia and Ukraine’s global importance in the production and export of both. Wheat futures have surged to an all-time high, and the geopolitical tail risk of food insecurity in the developing world is becoming more pronounced. The Roman poet Juvenal recognised the importance of bread and circuses to maintain civil order, and the emperors would no doubt be surprised to learn that Egypt and North Africa are now major importers of grain from the Eurasian Steppe. The 2011 Arab Spring uprisings were preceded by a spike in the price of food which led to regime change across the region.
These developments likely give more room to run for two of the investment theses which we have had sympathy with over the last two years. One being, that inflation would likely be less transitory than many central bankers might have hoped, and that markets may not be able to rely on monetary support to the same extent in future. Secondly, that there has been a structural underinvestment in the old economy (commodity production & supply chains) and too much capital allocated to flashy tech stocks. As a result, our commodity-focused value equities, inflation-linked bonds, commodities, and absolute return strategies, have been strong performers recently.