Stocks fell last week as the Russia-Ukraine conflict continued to weigh on risk appetite.
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.
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:
(1) 𝑂𝑖𝑙 𝑖𝑠 𝑜𝑣𝑒𝑟𝑣𝑎𝑙𝑢𝑒𝑑
A model by bank Lombard Odier suggests that the fair value of $OIL is $61 per barrel, indicating an overvaluation of 75%.
We are value investors and like assets that trade below their fair values.
(2) 𝑇ℎ𝑒 𝑐𝑜𝑛𝑓𝑙𝑖𝑐𝑡 𝑤𝑖𝑙𝑙 𝑙𝑒𝑎𝑑 𝑡𝑜 𝑙𝑜𝑤𝑒𝑟 𝑑𝑒𝑚𝑎𝑛𝑑 𝑓𝑜𝑟 𝑜𝑖𝑙 𝑖𝑛 𝑡ℎ𝑒 𝑙𝑜𝑛𝑔 𝑟𝑢𝑛
Europe is planning to get rid of its dependence on Russian fossil fuels by 2030, by increasing investments in renewables and energy efficiency.
This will lead to lower demand for oil in the long run.
(3) 𝑂𝑖𝑙 𝑖𝑠 𝑠𝑡𝑖𝑙𝑙 𝑛𝑜𝑡 𝑒𝑛𝑣𝑖𝑟𝑜𝑛𝑚𝑒𝑛𝑡𝑎𝑙𝑙𝑦 𝑓𝑟𝑖𝑒𝑛𝑑𝑙𝑦
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.
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.”
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.
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 $MRK (Merck & Co.) .
𝗔𝗿𝘁𝗶𝗰𝗹𝗲 𝗼𝗳 𝘁𝗵𝗲 𝘄𝗲𝗲𝗸
“Panic Journal Russia / Ukraine Edition Part 2”
– This blog post suggests how to prepare mentally for a long Russia-Ukraine conflict.
– Among the suggestions: do not expect a quick recovery, do not not sell, have enough liquidity in the portfolio.
– The post argues that high oil prices will speed up the shift to green energy, so oil stocks ($XOP) may not be a safe investment after all.