The new environment after the Russian invasion of Ukraine.
How to reposition the portfolios.
The Russian invasion of Ukraine is having and will have an important impact in world politics for a generation or more: Europe is more united than ever; Russia has become a pariah among developed democratic countries; energy security is becoming a first priority for European countries, etc. What are the practical economic and financial consequences and how can investors profit from this environment?
Si vis pacem, para bellum
The first long-term negative consequence is that the “peace dividend” is over. As Julius Cesar said 2000 years ago, “if you want peace, prepare for war”. And so be it, Germany and Italy have already announced a significant increase in defense investments and other countries will follow. These investments for peace will decrease the amount available for other purposes. Investment opportunity: traditional defense stocks and cybersecurity companies.
Avoiding high valuations
The second negative consequence (in this case, short-term) is that the prices of many commodities are increasing very rapidly, which has a short-term impact on lower GDP growth and higher inflation. If we look at the futures markets, in one or two years, this impact may have disappeared as commodity prices will have come back to previous levels. In any case, the higher inflation rate expected will make central banks more hawkish in their monetary policies and hypergrowth stocks with demanding valuations should be avoided in the portfolios.
The ESG investment approach is as valid as before the war
Focusing on energy security
The most important short, medium and long term consequence is that countries are accelerating their pursuit of Energy Security (The new ES of the ESG investment?) to avoid their dependence on Russian oil and gas. In the oil crisis of the 70s after the Arab oil embargo, many countries started to invest in their nuclear power reactors to gain more energy independence. In this case, we foresee an acceleration of investment in wind and solar energy, battery storage, hydrogen and ammonia technologies, carbon sequestration, small size nuclear reactors, energy- saving devices, isolation materials, and other technologies linked to cleaner energy. This is a once-in-ageneration opportunity to invest in both public and private markets.
To look good
To accelerate this “cleaner energy” goal, there is need for what we can call “decarbonisation metals”, that include copper, lithium, rare earths, zinc, aluminum, cobalt, etc. Mining companies in this space are to be favored.
Health is always important
Health care companies will again be a favorite group as they (1) are defensive in a lower GDP growth environment; (2) are not much impacted by the increase in commodity prices; (3) have a secular growth as the population ages and (4) valuations are very good in pharmaceutical companies and reasonable in medical equipment companies.
As a final thought, the ESG investment approach is as valid as before the war, as we look for companies that will profit economically, while caring for the Environmental, Social and Governance aspects, and we have not excluded any company so far because of the nature of its business.