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Ok. Got itWe look at the Ukraine-Russia conflict and how this impacts both international and South African markets.
Investment research note
3 March 2022
The unfolding events with Russia’s invasion of Ukraine raise the concerning prospect of a new Cold War or even World War 3. While we don't know how far Russia is prepared to press its expansionary efforts, or the extent of the response from the North Atlantic Treaty Organization (NATO) (and more broadly Western countries) at this stage, we can evaluate some of the potential economic implications and how South Africa's portfolio is positioned. Russia represents a small part of global equity markets (less than 1% of the MSCI All Countries World Index), although many global companies have operational exposure to Russia and Ukraine where the impact of current events could be felt. However, the broader and more significant impact is via supply chains, global trade, commodities and the impact of sanctions.
Russia is a major commodity producer and contributes more than 10% of global crude oil and natural gas production. These prices have risen as events unfolded, with oil and natural gas up nearly 30% since the beginning of this year. This comes at a time when global crude oil prices as well as other energy prices are already high and have been a primary driver of higher global inflation. Europe’s reliance on Russia’s supply of natural gas poses a region-specific inflation and growth risk. Panic-buying and increased defence spending are two more factors that could add to inflationary pressures in the region in the near term. So far, the supply of gas has not been curbed from either side. Increased supply from Iran and the release of US strategic reserves will serve to mitigate constrained oil supply.
Other significant commodities affected by this conflict include wheat and palladium. Palladium is a key component in the production of semi-conductors. Global supply was just beginning to recover, so further disruption will impact global auto production.
Potential impact for South Africa
While South Africa would not be immune to further inflationary pressures due to a higher oil price and would also bear the impact of potentially weaker global growth further down the line, there are some mitigating factors. Sustained higher commodity prices are positive for South Africa. The past period of high prices for coal, platinum group metals, and gold gave the government fiscal breathing room because of higher tax receipts from mining companies. Any continuation of this trend will provide further fiscal tailwinds. This has also supported the rand through strong terms of trade and improved the country’s external position via the current account. Both these factors have supported a more stable experience thus far versus other emerging-market peers.
Portfolio positioning – diversified for resilience
We have a deliberate strategy of constructing portfolios that are diversified. We spend a lot of time assessing various scenarios, thinking through the likelihood of the range of outcomes, and then positioning portfolios to withstand the range of outcomes. While we haven’t contemplated the exact current scenario, we certainly have catered for an environment of higher inflation and lower growth. We have also increased the country risk-premium for Russia and more broadly Eastern Europe. The ultimate risk management lever remains position-sizing in portfolios.
We will remain vigilant to the unfolding events in the Ukraine-Russia conflict and adjust positioning if it becomes necessary. This includes identifying opportunities that we believe are rewarded appropriately given the risks, as well as the need for further risk mitigation. In addition, we retain a key focus on the implications for policymakers globally, given the impact this would have on portfolios. The see-through direct and indirect exposure to Russia remains minimal in a typical balanced portfolio, which we believe is manageable.
Disclaimer This communication is issued by Nedgroup Private Wealth (Pty) Limited and its subsidiaries ('Nedbank Private Wealth') for information purposes only, and recipients should not rely on the information as advice without obtaining financial, tax or other professional advice. The information was obtained from various sources and may include facts and events or prevailing market conditions at the time of the information going to print. Nedbank Private Wealth does not warrant the completeness or accuracy of the information and does not make any representation that the information is appropriate for use by all investors in all jurisdictions. All opinions expressed and recommendations made are subject to change without notice. Nedbank Private Wealth and its employees may hold securities or financial instruments mentioned here. The information in this communication is not an offer or solicitation of financial services or products, and Nedbank Private Wealth accepts no liability for any loss or damage, including, loss of profits or any type of financial or other pecuniary or direct or special indirect or consequential loss, whether due to negligence or breach of contract or other duty as a result of using or relying on the information in this communication. |