Hedge Clippings | Friday, 04 March 2022
To most casual (i.e non expert) observers, particularly tucked well away in the South Pacific, the Russian invasion of Ukraine is remote - or controllable via the remote control of one's TV. As such, while alarming, it is not physically threatening - yet. Not so for one of our UK correspondents, a military man of some 40 years experience, who wrote to us this week that Ukraine is, in his opinion:
"More dangerous than Cuban missiles, Czechoslovakia 1968, all the Palestine wars, 9/11, all Afghan wars - the whole lot. NATO is in effect already at war with Russia/Belarus given direct supplies of extensive intelligence and arms to Ukraine. It surely can only be a matter of time before Putin tries to put a stop to that with something aimed just outside Ukraine's borders. And then if one assumes Russia prevails at some point, Russian forces will be arrayed all along the W border of Ukraine, directly facing newly mobilised NATO forces - and only a miracle would prevent some sort of interaction between the two - probably in the air."
Which brings us back to the question we posed in Hedge Clippings last week: "Beyond the shorter term outcome of the invasion, the longer term question will be what happens when/if the Russian forces reach the western and northern borders of Ukraine? What, or where next?"
We can't see Putin backing down, given he was mad (or possibly as described by his old mate Trump, "smart") enough to think he'd prevail. While the West may not put troops on the ground, providing military support is as close as one can go without pulling the trigger, leaving sanctions as the only solution. To date, and remembering it is early days as yet, the West has been reasonably swift, and generally united, in ramping up at least the rhetoric of sanctions, although they have yet to really bite outside financial markets such as energy prices, the Russian stock exchange or the currency.
Our preference remains to put pressure on Putin via the confiscation of the considerable ill-gotten gains, or the cancellation of visas of the Russion oligarchs, whose assets have been on conspicuous display in the UK, Europe, and the high seas for the past 10 to 20 years. Even without such laws being enacted, one can see pre-emptive measures being put in place such as Roman Abramovich's announced sale of Chealsea F.C. This may or may not work, but at least there's a chance Putin will listen to his cronies, because he's certainly not taking any notice of anyone else, either inside Russia or elsewhere. If not, eventually a Claus Von Stauffenberg will step up, albeit hopefully with a more successful outcome.
So where does that leave investors in Australia, and specifically in managed funds - which after all is supposed to be the focus of Hedge Clippings? Earlier this week we spoke with Dean Fergie from Cyan Investment Management, who while accepting that this is just the latest in a series of challenges for markets and therefore for fund managers and investors, takes a sanguine and longer term view: In fact he sees the prices of some oversold companies, particularly in the previously overbought tech sector, as an opportunity. Markets and returns over the past few years have created unrealistic expectations in many investors' eyes, but as he reminds us, investing in a well researched diversified portfolio of funds consisting of quality stocks is a long term proposition, not a speculative punt.
Of course the key is diversification - a key ingredient in any risk mitigation strategy. Another strategy in risk mitigation is to ensure the portfolio contains uncorrelated assets - or at least those that aren't too highly correlated. This can be easier said than done as in an extreme market sell off, many assets become correlated. At present of course we're not in an extreme market sell off, but gold, long out of favour, is acting as one might expect as negatively correlated to equities. For a view on a completely uncorrelated asset, Damen Purcell this week spoke with John Swallow from Laureola Advisors who invests in Life Settlements, a little known market in Australia, but one worth considering as a pure diversifier.
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