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CHRIS BURRELL ’ S BLOG

Inflation , war and sanctions : what does it mean for investing ? ( 29.03.2022 )

There are two key geopolitical factors influencing markets . The first is inflation and the second is the Russia / Ukraine war and sanctions .

Inflation

The inflation numbers in the US are startling , currently at 8 % and this before the impact of sanctions . Central banks have been ineffective with interest rate increases , the US Federal Reserve announcing a 0.25 % increase in March and talking tough , when material increases should have been made 12 months prior . Likewise , the Reserve Bank of Australia has been missing in action .

The combination of inflation with ineffective fixed interest rate increases has seen a change in markets over the past fortnight , with equities as the preferred asset class . For the moment , this renewed enthusiasm for equities has replaced the January market correction , particularly in the USA . It makes little sense to invest in fixed interest with duration , as the coming interest rate increases are likely to see further capital losses on long dated fixed interest bonds . Property will continue to show some opportunities , although residential property has shown significant capital appreciation and is vulnerable to correction with the interest rate increases coming down the pike .

This leaves equities as the preferred asset class both domestically and internationally . This is notwithstanding significant pockets of overvaluation , particularly in the technology sectors in the USA . There has been a correction in these overvalued sectors with the NASDAQ off 20 % a fortnight ago , although showing some recovery since .

Russia / Ukraine War A war and sanctions

The Turkish Government announced several weeks ago that they thought the warring parties were close to a cease-fire . Based on this announcement , it seemed reasonable to apportion probability to the three scenarios further below :

This proved wishful thinking and we have all witnessed the calamitous situation caused by Russia ’ s aggression . It is now difficult to see this matter having a short duration , as there are criminal war crimes and Ukraine unlikely to cede territory , meaning it will need to retake it militarily and there may be prolonged trench warfare in eastern Ukraine ( refer per current probabilities in above table ).

We are seeing various reactions , mostly in the prices of commodities due to the war and the ensuing sanctions . President Biden announced during his trip to Europe last week that the US would ship 15 billion cubic meters of LNG to European Union in 2022 . This is an extraordinary number given that the reason that gas prices in the US have always been less to those internationally , is that for many decades the US did not allow export of oil and LNG for strategic reasons . There are now a handful of LNG terminals which have been built , some of which previously were sending gas through the Panama Canal to Asia . It is likely that these exports will cease with the high prices in Europe meaning that is where US gas should be transported . Australian LNG suppliers will continue to benefit from strong LNG prices and a permanent change in the markets as Europe will not return to such high dependency on Russian gas and will continue to diversify suppliers .

Elsewhere in commodities , Canada has announced that it will do its part to replace Russian base metals with Canadian mined product . The bottom line is that Australia is a beneficiary of the terrible events in Ukraine and its sanctions ; so the commodities markets will continue to be strong .

Finally , Ukraine shows that the West should not get woke and be dependent on Russia for fossil fuels . What does this mean for investing ?

Firstly , commodities of all types are showing increased prices as a result of the Russian sanctions and reduction in supply of commodities including grains from Ukraine and Russia . But more broadly , it is a time for considering listed businesses and ascertaining their value range , selecting those on a risk return basis that are in accord with one ’ s investment strategy and conversely , being prepared to exit those which are “ likely to do nothing ” or perform negatively . For fixed interest , the Burrell strategy of remaining in floating rate interest securities and medium term as the sweet spot has borne fruit . According to Bank of America strategists , the third great bond bear market is now underway , with

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