The war in Ukraine has dramatically changed the world since our last email update, and its potential consequences can be significant, depending on the duration of the conflict. Be prepared for more market volatility, as the market has exceptional sensitivity to news headlines due to the uncertain outcome associated with war.
Geopolitics aside, this conflict has major implications to natural resource and agriculture markets, including oil, natural gas, fertilizer, industrial metals, and grains like corn and wheat. Aside from the conventional military actions that are disrupting the flow of goods at the ports of the Black Sea, sanctions and economic warfare have created supply deficits in many items. This has sent commodity and oil markets in a frenzy, with prices swinging wildly as investors try to gauge where supply and demand will be in the weeks and months to come. The most immediate economic damage would be Europe entering a recession, due to the fact that a significant percentage of their oil and gas imports are coming from Russia. One fear is that Russia could cut off Europe from oil and gas, which would be exceptionally devastating to Germany and Italy. To counter this possibility, countries across Europe are restarting old power plants that use other forms of energy including coal and nuclear. Another issue is that Russia and Ukraine combined make up 30% of the exported grains (corn, wheat, barley, etc) in the world. Both countries' exports flow through the ports on the southern coast of Ukraine, which remains closed due to ongoing hostilities. This drop in supply is already pushing prices higher, and the longer the conflict continues, the bigger impact this will have.
If a war was not enough, recent data from China and South Korea shows that a sub-variant of Omicron, BA2, is rapidly spreading. In response, China has locked down several major cities, including Shenzhen (where the iPhone is made), and they are rapidly building hospitals like they did in early 2020. China has a zero-covid policy, meaning they shut down all movement of people when cases appear. This will only worsen the current supply chain issues that we face here in the US. Currently BA2 is only appearing in Asia, but history has shown us it is only a matter of time until it reaches the rest of the world. How the world government and population will respond is anybody’s guess, but many think the appetite for lock-downs has waned.
Both of these issues are only adding to our previous concern about inflation. Rising energy and grain prices make everything more expensive, and companies are forced to pass this cost along to the consumer or they will go out of business. In response to the changing world, we have made changes to our investment strategy. We reduced our allocation to international and health care, and increased our allocation to energy, and stocks that are anticipated to do well in an inflationary environment. Our cash position, which is greater than normal, is remaining more or less unchanged, due to a possibility that the US could enter a recession. Time will tell if this is the case, but we are focusing on a defense first strategy of investing, while also retaining a long term view of the markets.
Please do not hesitate to reach out if you have any questions, or would like to discuss anything further.
Citrus Wealth Management
O: 909.312.4412 // F: 909.312.4441
1461 Ford Street, Suite 103, Redlands, CA 92373
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Blaine Shira and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.