Market Impact & Implications of Ukraine War – Part I

This post was originally written on February 24, 2022 at 9:39 AM EST.

Today the market is pricing in the potential market disruption of the Russian invasion of Ukraine beyond the disputed territories. Despite the Biden Administration’s unprecedented transparency regarding US intelligence regarding the invasion, few market practitioners expected it. We are seeing that play out in the global market today.

What is the near-term impact on the global financial system beyond the humanitarian tragedy in the Ukraine?

1. Oil price have surged to beyond $100 which exacerbates the inflationary pressures already in economies which also feeds into the narrative of further supply chain disruptions, which were considered transitory until this point.
2. The read through to equity markets is “stagflation”: slowing growth with heightened inflation.  In that scenario not much works other than energy/commodity stocks.
3. The Russian currency is falling as a result of the conflict and the certain Russian markets have been shut. We will see if there is any blowback into other emerging markets.
4. Despite the severe sell off today, markets are usually quick to price in geopolitical conflicts, and markets reverse once an end game is in sight.  The global coalition against Russia is strong and it is unlikely Putin will be able to weather extreme financial sanctions for too long.  Russia cannot live without revenues from its sale of natural gas, so it will be unable to cut the flow to Europe, which has not happened to date. It is clear Putin’s intensions are purely territorial, to restore the Russian empire, but it is our base  case that Nato’s neighboring allies are enough of a deterrent to prevent any further expansion West.
5. Financial condition in the banking system and consumer balance sheets in the US remain very strong, so we are not forecasting a recession any time soon, and not as a result of the Ukraine invasion. We will see in March if this has any effect on the Fed to raise rates. Probably not.
6. Earnings out of our portfolio companies on balance remain very strong (see Palo Alto Networks).  Some companies (Home Depot) are pointing to slowing growth, however, despite very good earnings.

What have we done recently in our portfolios?

1. Added exposure to energy stocks
2. Reduced exposure to high p/e tech stocks
3. Added exposure to lower p/e exposure in the EV (electric vehicle) space
4. Fixed income: reduced exposure to longer duration securities

Bernhard Koepp is CEO and Portfolio Manager at C.J. Lawrence. Contact him a bkoepp@cjlawrence.com by telephone at 212-888-6342.