Olivier de Berranger, Deputy Chief Executive Officer and CIO, answers questions from Pierre Puybasset, Spokesman for La Financière de l’Echiquier (LFDE)
What are the main consequences of the Russian-Ukrainian conflict?
We are at the beginning of the conflict and the risk of military escalation cannot be excluded. The Russian attack has undeniably surprised by its scale and the means deployed. It is difficult to predict, as we have seen, the reactions of the Russian president.
The first consequences concern Russian financial assets: the Russian stock market has lost more than 50% since the beginning of the year and the ruble is down by more than 15%.
More generally, the economic consequences are of an inflationary nature: the shock observed on energy prices may affect global growth.
Finally, it marks the decline in the influence and capacity of the West to regulate geopolitical conflicts in the world.
What is the impact of this crisis on energy?
The price of oil exceeded $100 a barrel for the first time in 8 years on Thursday, February 24, and the price of gas delivered to Europe rose by more than 30%. It should be remembered that gas accounts for a quarter of European energy needs, of which nearly 40% comes from Russia. Russia also supplies a quarter of the oil consumed in Europe. The consequences for energy prices in the euro zone could therefore be very significant.
What about other raw materials?
You should know that Rusal is the largest producer of aluminum outside China, that Norilsk produces, for example, 22% of the world’s nickel, 44% of its palladium, 15% of its platinum, etc. Many minerals that are essential for the energy transition, for semiconductor production chains and therefore for electrification, are produced in Ukraine or Russia. Raw materials such as wheat, titanium or steel are also concerned. Thus, many of them saw their prices soar on Thursday, and this could paradoxically weigh on the price of the energy transition for example.
What impact should we expect on the major currencies?
This is probably where the tension can potentially affect the global economy the most. The blocking of Swift – the messaging system that enables international transfers – was particularly feared by the markets. More than 11,000 banks are connected to this system and disconnecting the Russian banks would penalize the entire banking system. The European banking sector has been the most penalized on the markets, losing more than 10% on Thursday. However, this sanction does not seem to be an option at this stage by the European and American institutions, just like the ban on Russian companies trading in $. Indeed, 50% of Russian exports are denominated in dollars, 30% in euros, which is consistent with a country exporting raw materials.
To date, the initial fear of the markets of a systemic crisis in the financial system has therefore subsided.
What are we doing in our management?
We do not have any Russian securities in our portfolio, but we are affected on three levels:
- Some companies held in our portfolio, such as Stellantis, Nestlé, Danone or Recordati may have 5 to 10% of their sales exposed to Russia. We are therefore closely monitoring the impact of possible sanctions. Exaggerated declines could also represent entry points.
- Rising material costs could impact company margins and supply chains, which have already been damaged by Covid. As we are not directly exposed to the raw material producers who will benefit from the surge in prices, we will be attentive to the ability of our companies to increase their prices to maintain their profit margins. The theme of pricing power, which has already been present since the beginning of the year, has been further reinforced by the Russian-Ukrainian conflict.
- The third impact is a general decline in the world’s risky asset markets and the spread of risk premiums on credit.
In this context, what is the response of central banks?
Central banks had started a tightening cycle based on high inflation and slowing growth, two pillars amplified by these events. The markets are considering a softening of the tightening cycle: fewer and lower rate hikes. The European zone, in direct contact with the conflict, could be particularly cautious, and the European Central Bank could revise its ambitions downwards to reduce the size of its balance sheet, to buy back assets, and to raise rates.
What elements will you be paying particular attention to?
We are only at the beginning of the conflict, which started on Wednesday night. However, there seems to be no risk of an armed response from the West and the responses will include economic sanctions that could affect global, European and corporate growth.
Although geopolitical crises have statistically represented entry points for the markets, it is probably too early to increase overall exposure to the indices indiscriminately. For the time being, the commodity price shock seems inflationary in the short term and could lead to a recessionary shock in the medium term. On the other hand, some stocks whose valuation would have been excessive, or those able to integrate an inflationary shock, could approach entry points.
We maintain our belief, stated at the beginning of the year, that the quality of companies’ results will determine their stock market performance, in an environment that will be very volatile in 2022.
Investing in financial markets involves a risk of capital loss.
The stocks mentioned in this document are mentioned for illustrative purposes. They are not necessarily present in our management.
The convictions are those of our management at the date of writing, and may change over time.
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