César Pérez Ruiz, Chief Investment Officer Pictet Wealth Management.
Cold War II
Now well into the second week of combat in Ukraine, sanctions imposed on Russia by governments around the world are unprecedented and already suffocating the Russian economy. For the first time in the history of the G20, a central bank is unable to access its foreign currency reserves. In the medium term, this could call the USD’s role as reserve currency into question for many countries. Some sectors outside the current scope of sanctions have also been penalised, with a number oil traders are now avoiding purchasing Russian oil for fear that future sanctions will block them from selling it. In parallel, a swathe of international companies have announced their exit from the Russian market, including both Visa and Mastercard over the weekend.
These “self-restraints” are sharply reducing Russia’s income sources at a time when its financial system is facing a lack of liquidity. Market index providers have ejected Russia from their indices, with MSCI moving Russia from emerging markets to standalone markets status this week. In fixed income, Russia's long-term foreign currency debt rating was downgraded by S&P to CCC- from BB+. Putin announced that government and corporate debt will be honoured, but paid in rubles. As Russian financial markets remained closed all of last week, investors sold Russian equities listed in London, creating price declines of up to 99%.
European equities have been hit hard due in large part to Europe’s dependence on Russian energy, which makes European companies especially vulnerable to higher energy prices. We prefer Swiss to euro-area equities and have bought some protection in portfolios through EUR/NOK puts in case the situation deteriorates. European leaders are now actively seeking substitution solutions to address dependence on Russian gas.
Options include extending the lives of nuclear plants, slowing the winddown of coal use and building infrastructure in ports to receive liquified natural gas from Qatar and the US. While this will be a slow process, it supports our 2022 capex investment theme. With the US and Europe now discussing a Russian oil embargo, oil prices have hit their highest level since 2008. In currencies markets, the mood was risk off, with the euro approaching parity with the Swiss franc and gold gaining almost USD50 in the week.
The US economy is relatively isolated from the war and last week’s employment report was quite strong. Despite low unemployment, US wage growth remained subdued in February, but still 5.1% up on the year—so something to watch. Fed chair Jerome Powell maintained his hawkish tone when it came to tackling inflation. Elsewhere, China’s National People’s Congress kicked off at the weekend. So far, it has announced a 5.5% Chinese GDP growth target for 2022 and pointed to additional fiscal expenditure plans. The Congress also reiterated criticism of speculation in the property market, while at the same time it stressed the importance of property policies customised to local situations.
