Old Mutual Investment Group

Macro Perspective 13/2022 | The implications of a new phase in the Russia/Ukraine war

March 29, 2022 Old Mutual Investment Group
Old Mutual Investment Group
Macro Perspective 13/2022 | The implications of a new phase in the Russia/Ukraine war
Show Notes Transcript Chapter Markers

Peter Brooke shares his latest market perspectives on the war in Ukraine entering a new phase, which could see a bloody stalemate as Russia increasingly loses ground, as well as how markets will adjust.

Peter Brooke  00:00

Good day. I'm Peter Brooke, a Portfolio Manager at the Old Mutual Investment Group. This is Macro Perspective 13 of 2022, and I want to talk about the war in Ukraine. The reason for this is that I think it is entering a new phase. 


Now, it's really important to caveat that I'm not a military strategist, and I got this geopolitical event 100% wrong. I was convinced Putin wouldn't engage in a wholesale invasion of Ukraine, because there's no way that the Russian army could hold a country of 40 million people. This is having failed in Afghanistan, which was only 10 million people at the time when Russia was at the height of its powers. But he went ahead anyway, causing immense pain to millions of Ukrainians, and some small pain to investors around the world. 

But the change that I'm referring to, is that the Russian army is starting to dig in. In other words, they're going into a defensive posture and digging their armor in. This is to try and compensate for the asymmetry of defense. Whereas von Clausewitz, the famous military strategist, put it, defense is the stronger form of fighting, and the Russians are just taking too many casualties. However, what this means is that Putin now loses momentum. And we potentially settle into a bloody stalemate, or if you're optimistic, it precedes peace. 

Von Clausewitz again said, war is a mere continuation of politics by other means. And it's very hard to see how Putin secures a victory here. He has transformed Ukraine into a proud state with a common enemy - Russia - right on his border. In other words, weakening his position. He has brought Europe together, and they will invest heavily on defense. They will also invest heavily in energy self-sufficiency, boosting the green economy, and reducing their dependence on Russian energy and removing a potential client in the long run. He has set Russia back as they lose access to Western technology. Time is now Putin's enemy. 


From a market's perspective, what we can expect, though, is that Ukraine will start to fall down the news agenda, and this is already happening. Currently, the shift in focus is to Covid lockdowns in China. Russia is no longer in most indices and their shares are written down to zero. This means the main focus on Russia is on commodity prices and the impact on inflation. Already, some of the froth is coming out of palladium, nickel, and wheat, all of which are down. Interestingly, De Beers said they will probably give up on the Chinese market, as all the Russian diamonds will go that way, and we can expect supply and demand of resources to readjust. 


There is no doubt that the lagged impact on food will be material, with more pain to come. Fertilizer prices have skyrocketed, and farmers will apply less fertilizer, meaning less crops in a year's time, meaning higher prices. And the poor lose out. We have to ask ourselves will bread riots in Egypt and xenophobic attacks in Johannesburg be laid at the door of Putin in the future? I'm not sure how this will play out. But I am sure that markets will adjust around it and keep moving and looking towards the next driver. 


Here's hoping for peace. Until next week.

How the war in Ukraine is entering a new phase
What can we expect from a market’s perspective?
What the lagged impact on food will bring