The market reaction has been very fluid and trying to keep up to date with what's going on changes from one minute to the next. Overall there have been winners and losers in the equity markets. risk off was the tone for the month as the world watched Russia threaten the Ukrainian border, and subsequently invade. In this uncertain environment we saw commodities and the rand hold strong, but risk assets sell off.
South African bonds and equities led the way thanks to their sensitivity to commodity prices. They also buffered portfolios from the negative returns from local and global property, global equities, and global bonds. Quotes from Warren Buffett on the Russia Ukraine war: Warren Buffett has warned against dumping stocks, hoarding cash, and buying gold or bitcoin when war breaks out, as he believes investing in businesses is the best way to build wealth over time. "If stocks are cheaper, I'll be more likely to be buying them," he said, celebrating the fact that a stock he was actively buying had dropped in price. The investor added that he wouldn't cash out even if the conflict escalated into another cold war or World War III.
"Well, if you tell me all of that is going to happen, I will still be buying the stock," he said. "You're going to invest your money in something over time. The one thing you could be quite sure of is if we went into some very major war, the value of money would go down. "I mean, that's happened in virtually every war that I'm aware of," Buffett continued. "So the last thing you'd want to do is hold money during a war."
Buffett, who has said he avoids doing business in Russia after running into problems there, emphasized that the US stock market rose during World War II and had marched higher over time. "American businesses are going to be worth more money," Buffett said. "Dollars are going to be worth less, so that money won't buy you quite as much.
"But you're going to be a lot better off owning productive assets over the next 50 years than you will be owning pieces of paper, or I might throw in bitcoins," he added.
In this article we share some of the economic and investment questions some of the asset managers have been receiving.
Allan Gray - Jacques Plaut
The only JSE-listed stock in our portfolios with material exposure to Russia is Mondi, which has a paper mill in Russia that accounts for 18% of earnings before interest and taxes. The Allan Gray Equity and Balanced funds have a 0.7% and 0.6% exposure to Mondi respectively; Stable has no exposure. The share price of Mondi has fallen 30% from its recent high point in February. British American Tobacco (BAT), our largest share, is the number two cigarette player in the Russian market, which accounts for an estimated 2-3% of BAT’s profits. While some of our other holdings, such as Glencore and AB InBev, have Russian interests, these are very small within the context of their overall businesses. The prices of Naspers and Prosus have declined by 35% since the start of February. This group has a small direct exposure to Russia – a classifieds business and a social media business – which accounted for 2-3% of overall value. The large drop in the share price could be because of fears that the world is becoming increasingly divided which, in turn, has led to renewed concerns about the long-term value of Tencent. Also, the sentiment towards some of the speculative technology sectors in which Naspers has been investing, like food delivery, has turned from extreme optimism to something more realistic. We are underweight Naspers/Prosus compared to the index, but it still comprised 7.3%, 5.6% and 2.2% of the Allan Gray Equity, Balanced and Stable funds (respectively) at the start of February, when accounting for both Allan Gray and Orbis exposure.
Below is a note from Phil Bradford, SA Head of Investments at PortfolioMetrix, regarding the dramatic events underway in Ukraine and how investor portfolios are positioned for this.
Investor portfolios and the Ukraine invasion
Recent events in the Ukraine have rattled financial markets, which have in turn left investors – who rightly want to understand the implications to investments portfolios – disconcerted. The key question to be answered is whether the events in the Ukraine will derail global economic growth and cause a downtrend in financial markets. Will the oil price escalate to $150? Will economic growth collapse? Will equity markets crash? While we can’t anticipate or avoid such events, or give emphatic answers, our investment process is designed to create portfolios where the outcomes are not overexposed directionally to one particular political or economic scenario.
Composure in the face of uncertainty
Sticking to a long-term investment strategy during dramatic events like what we are facing in the Ukraine is not easy. The temptation for investors is to draw conclusions, which experience overwhelmingly shows to be less obvious than they seem. History suggests that the risks of knee-jerk reactions are high and may inflict serious damage to portfolios, while severely compromising retirement planning outcomes. History also teaches us that events tend to be transient, but of unknown duration. Trying to time market exits and re-entries is exceptionally difficult and sticking to one’s strategy has been the more sensible option. It does mean enduring high levels of uncertainty, which is not easy.
Geopolitical events have seldom produced profound changes to the direction in markets, but rather amplify or create catalysts for underlying trends that are already in place. Leading up to Russia’s invasion of the Ukraine, markets were already nervous and had begun to pull back off recent highs as they anticipated central banks reducing Covid-era stimulus and raising interest rates. The invasion exacerbated the pre-existing market correction. Interestingly, markets rebounded strongly on Friday after the initial sell-off. Soul-less perhaps, but that is not a bad thing.
Well-positioned for turbulent times
The situation in the Ukraine is likely to take pressure off global central banks to hike interest rates as quickly as initially anticipated. Rates hikes are designed to slow economic growth, thereby slowing demand-driven inflation. A prolonged situation in the Ukraine and sustained high energy prices will hurt consumers and producers, resulting in a slower economic growth trajectory. The impact of the Ukraine may bring forward what central banks were hoping to achieve with rate hikes.
As investment managers, we accept that uncertainty and volatility are a given and that our role is to manage, not avoid, unforeseen risks. A robustly designed investment portfolio, with deliberate exposures to a wide variety of investment opportunities, is typically well-positioned to take advantage of market overreactions in times of volatility. Our portfolios are “on standby” to invest into downside dislocations if opportunities present themselves.