The Ukrainian crisis reorients the themes of world investments: McGeever

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“A major geopolitical realignment is underway”, which, like 9/11, “unpredictably shapes the foreign and military policies of major governments in the years to come”.

So wrote Citi’s market strategy team over the weekend in response to unprecedented financial sanctions imposed on Moscow by many nations – and some notable U-turns in European capitals – after Russia invaded Ukraine.

If a global geopolitical change of this magnitude is underway, it surely follows that a similarly seismic and multi-year change is also upon us in the global investment landscape.

The immediate playbook for investors will be to “eliminate risk” and accumulate the safest or most liquid assets. This means moving away from emerging market equities, credit and assets and moving to US Treasuries, first-rate government bonds and the dollar.

But what then? Opportunity always emerges from the crisis.

“Military, infrastructure and cybersecurity spending in the West is likely not only to have increased but also accelerated,” DWS chief investment officer Stefan Kreuzkamp wrote Tuesday.

Defense and aerospace actions have soared since German Chancellor Olaf Scholz’s bombshell on Sunday that Germany will commit about 100 billion euros (118 billion dollars) into a fund for its armed forces and increase spending on defense to over 2% of gross domestic product, finally meeting a NATO target set 16 years ago.

If all NATO countries accept the 2% GDP target, billions more will pour into defense and related sectors.

Germany’s Rheinmetall AG RHMG.DE jumped a record 25% on Monday and gained a further 18% on Tuesday to reach a new high of € 159 per share. Military sensor maker Hensoldt HAGG.DE skyrocketed 42% on Monday and added a further 20% on Tuesday to € 25 per share.

“This is an area that you would expect to see continued growth, especially if this extra spending from Germany and Europe comes in,” said Crit Thomas, investment strategist at Touchstone Investments, which oversees $ 34 billion in assets.

If so, it would be a reversal of the “peace dividend” that followed the collapse of the Soviet Union and the end of the Cold War three decades ago. The idea then was that lower defense spending would help reduce government debt, potentially paving the way for tax cuts.

This could change in the next few years.

FOCUS ON EVALUATIONS

JPMorgan economists said Berlin’s pivot of defense is one of the “number of profound political and political implications” stemming from the Russia-Ukraine war that will reverberate for years to come.

Others may prove equally important. Get energy.

As concerns about the offer and the impact of sanctions intensify, short-term prices are rising. Brent crude oil has jumped above $ 100 a barrel again, and some analysts say European natural gas prices for winter 2022-23 may be even higher than this winter.

Europe, which depends on Russia for about 40% of its natural gas, will reduce this dependence and seek alternative sources. Italy’s foreign minister said on Monday that Rome will buy more from Algeria.

These changes will take a long time to take effect, but once they do, the result could be that more supply from other countries simply increases aggregate global supply. If so, price pressures may ultimately be to the downside, not the upside.

Not only is Europe trying to wean itself off Russian energy, but it is leading the global climate-driven abandonment of fossil fuels.

The German government is preparing to speed up the passage of the Renewable Energy Sources Act through its parliament so it can take effect by July, according to a document viewed by Reuters.

European offshore wind companies Vestas Wind Systems VWS.CO, Nordex NDXG.DE and Orsted ORSTED.CO increased by more than 15%, 13% and 10% respectively on Monday. Investor interest in clean and renewable energy can only increase.

At a broader level of the index, Citi equity strategists note that investors’ response to most of the geopolitical events of the past few decades has been simply to “buy the drop.”

But Phil Toews, who oversees $ 2.2 billion at Toews Asset Management, believes this approach can no longer be taken for granted as inflation is so high now that borrowing costs are set to rise. Perhaps significantly.

He argues that the medium to long-term outlook comes down to valuation as well as to the sector. He notes that the final 12-month valuation of the S&P 500 Index is still above 20x earnings, in line with a bear market.

When you go back to the historical average of about 15 times your earnings, you play.

“Once valuations have faded, regardless of geopolitics, you can approach the markets with a new perspective. There will potentially be great opportunities out there eventually, ”Toews predicts.
Source: Reuters (by Jamie McGeever Editing by Paul Simao)

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