Commodities are “awkwardly” the safe-haven amid security risks
The invasion of Ukraine has catapulted the global economy and especially Europe from an energy crisis and tight commodity markets to a serious situation about immediate and longer term energy and metals security. As we said on today’s Saxo Market Call podcast the next step in this conflict and financial markets is to what extent the US and especially Europe is willing to inflict self-damage on their economy through tough sanctions against Russia risking retaliation on key ressources such as natural gas and industrial metals. In Europe this fragility is expressed through equity markets in the Netherlands, Germany, and Italy which are all depended on Russian natural ressources. The events in Ukraine will keep inflation rates elevated and given safe-haven flows nominal interest rates will likely come down pushing real interest rates into deep negative territory. Inflationary pressures will continue to negatively impact profit margins and thus equity valuations.
One of the derivatives of today’s actions in Ukraine is that globalization could be rewritten as first the pandemic and now the events in Ukraine have shown how vulnerable developed economies are in terms of their energy and industrial production security. In our view the process of changing global supply chains were already in motion but could get accelerated. Inside this reconfiguration Africa could become a key continent and battleground for resource access and a country like India could benefit enormously from changing global supply chains.
As we wrote yesterday, the energy stocks will and have proven to be a good hedge against geopolitical risks and continued inflationary pressures. The European energy sector is the best performing sector in today’s session with financials and consumer discretionary (carmakers etc.) leading the declines. Inside the materials sector the construction materials, paper and forest products, and chemicals industry groups are down hard while the metals and mining is only slightly down driven by steel makers while mining companies and aluminum smelters are gaining. The best way for retail investors to get exposure to energy and mining are through broad-based ETFs.
Russian equities in particularly have taken a big hit from the invasion with the leading Russian equity index down 26% in local currency. European companies with related Russian assets are also suffering today and the list below shows US and European listed equities with the highest exposure to Eastern Europe/Russia. In USD terms the Russian equity market is down 62% from the peak in September sending Russian equities 25% below the average price since 2013.