HOT TOPIC | Russia and Ukraine Conflict

The history of conflict between Russia and Ukraine goes back many years. As recently as 2014 Russia invaded and then annexed the Ukrainian peninsula of Crimea. According to the New York Times roughly 13 000 soldiers and civilians eventually died in the conflict. During the last few months President Vladimir Putin tried to prevent Ukraine from becoming closer to the west. Putin demanded security guarantees including an assurance by NATO that Ukraine will never join the group. After gathering his troops on the Ukraine border over the last few weeks, the president gave the go ahead to invade Ukraine. The escalation in geopolitical tensions between Russia and Ukraine adds uncertainty to the global outlook at a time when central banks are acting to fight inflationary pressures. Global financial markets have had a tough start to 2022. Developed markets are down in the range of 10% since the start of the year. The majority of this decline can be contributed to the fear of higher inflation and central banks tightening of monetary policies. The Russia and Ukraine tension is additional fuel to the fire. Unfortunately, no one knows what the outcome will be. Optimum believes that it will take time for the situation to settle down. In the meantime, uncertainty and volatility will persist but it also creates opportunities for our portfolios. We have identified the following areas which we will focus on in the following days:

• Gold exposure – we have included gold (physical and gold companies) as part of our portfolio’s tactical asset allocation. The main reason for the introduction at the end of 2021 and start of 2022 was to protect against higher expected global inflation. Gold can also be seen as a safe haven asset and over the last few days it once again proved that it provides protection in uncertain times. We will hold our gold position for the time being.

• Commodity exposure – The JSE consists of several resource companies and Optimum has been overweight these counters. Ukraine is an important producer of iron ore, manganese, uranium and coal. The war will have an impact on the supply of these commodities and our local resource companies might benefit from this. In addition, platinum counters can also benefit due to sanctions being implemented against Russia (who is one of the largest exporters of the metal).

• Energy supply – Oil jumped above $100 barrel for the first time since 2014. This will be a boost for companies like Sasol. In our global portfolios we also have exposure to energy exchange traded funds (ETFs) which have increased more than 6% in dollar returns over the last week.

• Cash – we normally hold low cash levels in the funds. With the current low interest rate environment, it does not benefit portfolios to hold high levels of cash. However, we did increase our cash position over the last few days to take advantage of opportunities that may arise. We buy assets that will deliver returns over the long term and during a crisis one might find the opportunity to buy good quality assets at affordable prices.

• Emerging markets – Russia is part of the emerging market index. We’ve already seen many countries put sanctions on Russia. Capital markets will also be hesitant to allocate investments to Russia and they will have to look at alternative emerging market exposure. Once again this can be an advantage for our market because of the relatively low corresponding risk and a market that is not expensively priced.

There are many risks and many scenarios that might play out over the next few days. Unfortunately, no one knows exactly what the outcome will be. Optimum will stay true to our philosophy and process and continue to look for long term trends at the right valuation.