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March 1st, 2022

Hedley market Commentary - March 2022

Hedley market Commentary - March 2022

The Russian invasion of Ukraine has been met with swift and harsh economic sanctions which could have a debilitating impact on the Russian economy but are also not without consequences for the rest of the World. Russia, for example, produces around 10% of the world’s energy and Russia/Ukraine 30% of wheat output and any supply disruptions will likely hurt western economies via shortages and inflation. Much has been said of Russia’s huge foreign currency reserves which have been amassed from sales of energy and other commodities. More than three quarters of Russia’s central bank reserves are foreign currency assets with half in foreign currency securities, like government bonds, which never leave their country of issuance and around 25 percent are tied to foreign national banks, private foreign banks, the Bank of International Settlements and the IMF These vast sums, in excess of $600bn, have been accumulated and retained by the state rather than being reinvested back into the economy and have been a useful means of collecting revenues in a country where tax collection is extremely inefficient.

In troubled times these reserves could be used to ‘prop up’ the Rouble or reinvest back into the economy as they have been in the past. However, there is an added complication this time around in that Russian Central Bank assets have been frozen by many western countries as part of economic sanctions, something which has never happened to Russia before, and with almost half of the reserves held overseas and no longer available, it puts added pressure on its finances.

While the geopolitical unrest is alarming for many reasons, the stock market swings are not something for most investors to panic about. Real world events can certainly make stock prices more volatile in the short term but have less impact on investment returns over longer

periods. If we look back at the Financial Crisis of 2008, the invasion of Iraq or the Russian annexation of Crimea, stock markets were extremely volatile for a time and breathless news commentary and scary headlines were unsettling; but look back at those times now and they are blips on a longer term chart. While no one knows how this event will unfold, financial markets will eventually price in the risks, find a floor and move on, leaving the politicians to sort out a longer term solution.

This market commentary is not intended to provide information sufficient to make an investment decision.

All opinions contained in this report constitute Hedley & Company Stockbrokers Limited Management’s judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility.

Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.

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