The following are my thoughts about events unfolding in Russo/Ukraine and their potential market impacts:
- I thought from the beginning that Putin miscalculated his campaign, expecting a quick walk-in to Kyiv. I believe Putin to be very smart. However, I am a student of history and studied the German Eastern Front campaign in WW2. As I review current events, Russia is making all the same mistakes the Germans did. Blitzkrieg does not work in mud or fighting building to building. Whether Putin was told that the invasion would be successful in a few days or weeks because his intel officers were afraid to deliver any other message or they in fact blew the call, is probably a moot point now.
- A new, even more, aggressive second phase of Russia’s operations has begun. A 300km front has been opened, à la WW2 with rocket and artillery barrages designed to obliterate opposition. The goal seems to be complete control of the resource rich Donbass region and importantly, a victory before the May 9th Victory parade in Moscow, which is extremely important in Russian culture – especially the political culture. Victory over the Nazis in WW2 is what the parade commemorates and it would not surprise me to see the second phase attack described as a celebration over the “Nazis” in Ukraine.
- On reflection, this to me is what makes the current period so dangerous. How important is it for Putin to appear at the May 9th parade and do so victoriously? I think it is very important. Will he even show up if things are still not going well? I think he will because if he doesn’t, the message to the Russian people will be that there is trouble, the war is not being won. Stories of Ukrainians taking pictures of dead Russian soldiers then sending the photos back to their Russian mothers are likely to be effective at whipping up dissent. And clearly need to be “Buried” pardon the very obvious pun…
- The May 9th parade is a big deal and Putin needs a win. Assuming, the West wants Putin out of office, which I believe it does. Then the West needs to be doing everything possible to deny him the victory. Hence, we are finally seeing some support from the US, Finland, Norway, etc.
- I view the latest/key geopolitical and war risk being Putin becoming frustrated and consequently leads to usage of different weapons systems. The Russians have already used in small amounts, phosphorus bombs. In Russian military doctrine, the use of 155- millimeter howitzers which can project nuclear-tipped shells (with low yield and highly concentrated effects), is not considered to constitute the same operation as sending a nuclear-tipped ICBM. Wow! This got my attention!
- It was interesting to me that Thursday morning President Biden noted that the US is sending 155 mm howitzers to Ukraine. The US is also shipping other weapons to the UK, which could prove to be deterrents to the use of ICBMs by Russia. Finally…
- I see the global response as a painful one-step at a time approach. Putin is being blocked from what he wants to achieve in Ukraine. If Putin becomes frustrated and I believe he will, would he do something dramatic, like fire those tactical nuclear-tipped shells? A stretch. However, in today’s world of geopolitics, is it?
- Worst case, this type of response from Putin would likely bring about retribution which might even involve the entry of NATO nations into Ukraine, particularly in the West.
- I now believe Putin needs to do something dramatic. From what I have seen and speaking with people in the war zone, we are looking at a long, drawn-out war of attrition. I do not believe either side wants or can sustain this outcome.
- Unfortunately, Ukraine does not have the numbers to sustain a long fight, particularly when there are Syrian and Libyan mercenaries being added to Russian forces. Support is required from the US and the free world.
- Russia in the meantime is hemorrhaging financially and if the truth be told militarily for little progress.
- The evolution of this proxy war in Ukraine has market impacts in addition to what we have already seen. Estimates of what the crops will look like, especially wheat where Ukraine is one of the top three exporters in the world, vary from 1/3 of the crops not being planted to higher numbers.
- We would observe it is interesting that Russian tanks have stayed on the roads and not crossed open fields which are available to them. I have written on this previously. I believe the Russians do not want to repeat the mistakes of the Germans and sink in the mud as winter thaws.
- Finally, if the Russian tanks do some broken field running, I would expect crop estimates to deteriorate further, as well as compound their logistics problems.
WHAT TO DO?
- Showing my age again?! Iron Maiden had this great song “Run to the Hills”.
- Don’t run for the hills — we would be an active stock picker.
- Yes, Technology stocks have sold off. Our technology focus is primarily on software companies, where we anticipate stronger growth and recurring revenues. Also, for the most part, valuations are more compelling than the FAANG companies.
- We view healthcare as a more compelling opportunity. Healthcare we see as a defensive growth play, with more attractive valuations and lower beta. Our portfolios are being rebalanced to a modest overweight.
- Overall, we are focusing our portfolios on earnings growth, cheaper valuations, and lower beta. On a global basis, the beta trade has been range-bound because beta is the definition of cyclicality, and the economy has been strong and stable but we think this is ending. A slowdown has begun and is likely to last well into 2023. Therefore, we think investors should be reducing their exposure to high beta names. High beta and high valuation is no longer being rewarded. This is reflected in our current portfolio holdings and weights.
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