Just as markets were positioning themselves for a recovery from January’s inflation-driven jitters, Russia’s unprovoked actions on Ukraine dominated February’s headlines, over-shadowing those of inflation, rising interest rates, President Ramaphosa’s SONA and Finance Minister Godongwana’s maiden budget.

The world woke up on the 24th of February to the reality of Russian military forces invading and attacking Ukraine, with stock markets across the globe opening some 2% to 3% below the previous day’s close. Considering Russia produces roughly 10 million barrels of oil a day, making her the world’s third largest producer behind the US (+-20 million bpd) and Saudi Arabia (+-12 million bpd), Russia’s impact on global energy supply cannot be understated. The potential further strangling of an already-constrained global oil supply pushed prices above $100/barrel, snowballing inflation concerns and, by extension, the path of global interest rates. We know they’re going up – we’re now asking how fast, and how far?

Following on from January, US inflation rose even further to post a multi-decade high of 7.5%, and while forecasts were pricing in a peak towards the end of the first quarter, this has certainly been pushed out somewhat. Along with the yet-to-be-confirmed rate hiking cycle from the US Fed, some clouds may have lifted but cool winds prevail.

Benjamin Graham, the godfather of value investing and mentor to Warren Buffett, famously said “Successful investing is about managing risk, not avoiding it”. So, as interest rates inevitably rise over the coming year, coupled with lower stimulus from central banks, it is possible that we will see slower economic growth. But this is not to say that it is all doom and gloom.

We have previously commented on a ‘stock-picker’s market’, and there has possibly been no time more evident than this. Looking at index valuations casts a misleading shadow, but there are many businesses that are achieving structural growth, dominating their markets, enjoying increased market share and growing their profits – and these are the stocks to focus on!

Remember: Turnover is vanity. Profit is sanity. Earnings are a reality!

Amidst the backdrop of this uncertain and volatile world, we remain hopeful that a mediated solution to the situation in Ukraine will emerge, and not an ongoing military one. Our principle concern remains the millions of innocent civilians whose lives, livelihoods and way of life are under threat from an oppressive regime. We can only hope and pray that this will be resolved speedily, peacefully and without lasting damage.

As always, thank you for entrusting us with the management of your portfolios and I wish you all a safe week ahead!

Steve Crouse
Chief Investment Officer and Senior Advisor