Stocks fell last week as the Russia-Ukraine conflict continued to weigh on risk appetite.
www.ft.com/content/489ccf83-6a26-4727-8a4b-47a24cbe7bcf
We reduced the risk level of the portfolio last week because:
1. The global economy continues to slow down, according to the OECD leading indicator.
2. The Russia-Ukraine war may escalate further, even if we hope it won’t. Escalation could be either economic (Russia stops supplying gas to Europe) or military (Russia-NATO conflict).
3. High oil prices have historically led to lower corporate profits with a 12-month lag. If oil prices stay high, corporate profits could fall next year.
stuckinthemiddle.substack.com/p/from-bad-to-worse?s=r
4. The market is in a negative trend.
We would consider re-risking if there is a resolution to the war. It was in the news today that talks between the parties have resumed.
The portfolio is now invested in high-quality European Industrials, Telecoms, Real Estate as well as global Healthcare stocks.
The new portfolio should be resilient in a recession, although we would still expect to lose money if we enter one. On the other hand, if there is a resolution to the war, the portfolio should gain.
We do not have any positions in the best performing sector of this year, Energy ($XLE), because:
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A model by bank Lombard Odier suggests that the fair value of $OIL is $61 per barrel, indicating an overvaluation of 75%.
am.lombardodier.com/contents/news/global-perspectives/2022/march/should-surging-commodities-chall.html
We are value investors and like assets that trade below their fair values.
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Europe is planning to get rid of its dependence on Russian fossil fuels by 2030, by increasing investments in renewables and energy efficiency.
ec.europa.eu/commission/presscorner/detail/en/ip_22_1511
This will lead to lower demand for oil in the long run.
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The fact that Energy equities have returned almost +40% for the year to date does nothing to change the fact that oil is not a sustainable source of energy. Every investor has to evaluate what kinds of investments they are happy to put into their portfolio, even if avoiding certain investments has a cost attached.
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Overall, the economic landscape looks uncertain at the moment, and it’s possible to draft plausible negative scenarios. For example, as TS Lombard’s Dario Perkins argues: “Once inflation is a problem, there is no real chance of a soft landing because the central bank has already messed up.”
blogs.tslombard.com/dont-bet-on-a-soft-landing
We are happy to play defence for the moment and wait for either a resolution to the war or a proper panic before re-establishing riskier positions.
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@triangulacapital -3.3%
$SWDA.L -11.9%
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Financials $ALLY (Ally Financial Inc), $AMUN.PA (Amundi SA), $KB (KB Financial Group Inc), $SAN.MC (Banco Santander SA), $BARC.L (Barclays), $LLOY.L (Lloyd’s Banking Group PLC) and the online advertising company $FB (Meta Platforms Inc) were sold.
They were replaced by $SIE.DE (Siemens Aktiengesellschaft), $DTE.DE (Deutsche Telekom AG), $ROG.ZU (Roche Holding Ltd), $ML.PA (Compagnie Generale DES Etablissements Michelin SCA), $BAYN.DE (Bayer AG), $NVS (Novartis ADR) and $MRK (Merck & Co.) .
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“Panic Journal Russia / Ukraine Edition Part 2”
valueandopportunity.com/2022/03/07/panic-journal-russia-ukraine-edition-part-2/
– This blog post suggests how to prepare mentally for a long Russia-Ukraine conflict.
– Among the suggestions: do not expect a quick recovery, do not not sell, have enough liquidity in the portfolio.
– The post argues that high oil prices will speed up the shift to green energy, so oil stocks ($XOP) may not be a safe investment after all.