Over the past few weeks all the headlines have been dominated by the war in Ukraine, which began at the end of February. This war started when the Russian forces invaded Ukraine and is ongoing as I write this note.

This outbreak of war with Ukraine has impacted the world, financially, economically, and socially. It has had a major impact on the price of oil and energy. Oil recently touched a high of over $120 a barrel, mostly due to the fact that Russia is one of the biggest global suppliers.

This in turn has a major global inflationary effect, which has the potential to create a significant inflationary shock that could persist longer than previously anticipated. Many western nations reacted to the situation by imposing significant sanction on Russia and providing military equipment to Ukraine. This has disrupted stock markets and put active equity Fund Managers and their portfolios through a real-time stress test.

Prior to the invasion, inflation was already an issue in the post-lockdown era. Central banks subsequently raised interest rates, which were the big market drivers. The Bank of England raised the base rate to 0.75% – the pre-pandemic level – with more rate rises to come if inflation hits their forecast of 8% later this year. The Governor, Andrew Bailey recently warned that “…uncertainty about how the Russia-Ukraine war will develop has made it nearly impossible for the Bank of England to chart the direction of the UK economy”. The Invasion of Ukraine has definitely come at a difficult time for the global economy.

However, this inflationary market dynamic has been present for several months and is one which tends to favour more value, cyclical sectors, such as: mining; energy; and financials. With the mining sector performing particularly well, benefitting from the war in Ukraine, with the surge on commodity prices, due to some or all the Russian/Ukraine supply being unavailable. There is also a consensus that there is a new bull market in energy stocks, which may be in its infancy. If $100 a barrel becomes the new normal (rather than a temporary fluke) oil companies will begin printing money. There will also be benefits to energy infrastructure companies that build storage facilities and pipelines etc.

In the current climate, trying to pick up bargains while everything is in the air can prove costly, an option would be to drip feed some money into a portfolio if funds allow. Meanwhile, let’s hope for peace and a near-term resolution to the war.

Stephen Lovelock