Lowes Magazine 122

DOUG’S DIGEST

NO-ONE COULD HAVE FAILED TO SEE THE ONGOING news coverage of Russia’s invasion of Ukraine, or the horrific cost being paid by the Ukrainian people. Our thoughts go out to all those who have been affected. Against this immeasurable human cost all others pale into insignificance, but nevertheless the repercussions of this war are already having adverse effects on economies all around the globe, and will continue to do so for a long time to come. The first reaction of the main western democracies was to impose sanctions on both certain Russian individuals but also on the ability of people and companies to trade with Russia and the companies within. This included removing access for most of the major Russian banks to the SWIFT system, which allows banks and other financial institutions around the world to easily action money transfers. These sanctions and the focus of public attention quickly made many firms publicly cut ties, including large oil and gas companies such as Shell and BP, who ended joint ventures with their Russian counterparts despite this costing them billions of pounds. These announcements caused concern for investors, with equity markets falling sharply. The UK stock market, as measured by the FTSE 100 index, fell 9.29% between 10th February and the 7th March. The shares of Russian companies took the biggest hit, of course, with the stock exchange closing in an attempt to prevent a mass sell off leading to a collapse in prices. This led to Fund houses writing down any Russian investments within their holdings to zero initially and then selling those holdings as soon as the market re-opened, and funds with significant Russian exposure had to suspend trading. For UK investors, Russia has become toxic. For most western nations direct trade with Russia forms a relatively small part of their GDP, and after the initial shock had passed equity markets began to recover. The main long-term effect, however, is expected to come through rises in commodity prices. Inflation had already become an issue at the start of the year, with the UK Consumer Prices Index (CPI) rising by 5.4% in the year to January, prior to the Russian invasion. Once the war began we quickly saw oil and gas prices rise sharply with fears that Russia, one of the biggest global exporters, may cut supplies in retaliation for the imposing of sanctions. War in Ukraine

Oil and gas are not the only commodities to come out of Russia and the Ukraine however. Over 50% of the world’s supply of wheat comes from the two countries, for example, and both are

big sources of corn and sunflower oil too. Also, Russia is a large producer of fertilizer, and restriction to supplies of these ‘soft’ commodities is already leading to rising food prices. In addition, Russia is a major source for metals such as nickel and platinum, which are already in demand due to the moves towards clean energy and the electrification of heating and transport to help combat climate change. The inability of companies to source these raw materials from Russia will cause prices to rise further, leading inflation to rise higher than originally anticipated, and in all likelihood stay higher for longer. This now leads to a dilemma for central banks such as the Bank of England in the UK and the Federal Reserve in the United States. Both are tasked with keeping inflation around a 2% level, which is a target level way below the 7% CPI declared in the UK this month. The traditional way of bringing inflation down is to raise interest rates, thus increasing borrowing costs for individuals and businesses alike. The theory is having to spend more on repayments of mortgages or business loans reduces the amount available to spend, so reducing demand and consequently the prices that can be charged for goods and services. With price rises coming through in food and energy costs, however, areas where people will struggle to cut back their spending, raising interest rates could simply risk choking off growth in the economy without reducing inflation, leading to an effect known as ‘Stagflation’. The central banks are walking a fine line therefore, between controlling inflation while not damaging the domestic economy and employment levels. As most investment analysts and fund managers we speak to are the first to admit, few people know how things will develop from here both on the ground in Ukraine and in economies around the world. For now, we continue to monitor portfolios, looking for opportunities and making changes when necessary, whilst continuing to make sure we aren’t taking unnecessary risks in times of uncertainty.

120%

Rise in Commodity Prices in 2022

100%

Wheat

Nickel

80%

60%

40%

Percentage Change

20%

0%

Source: London Metal Exchange/Agriculture & Horticulture Development Board

-20%

31/12/21

14/01/22

28/01/22

11/02/22

25/02/22

11/03/22

25/03/22

08/08/22

Lowes Financial Management and Lowes Investment Management are authorised and regulated by the Financial Conduct Authority Visit: www.Lowes.co.uk | Call: 0191 281 8811 | Email: enquiry@Lowes.co.uk

14 Lowes.co.uk