The dramatic event, of course, is Russia’s brutal invasion of Ukraine. It is an unwarranted breach of international law with tragic consequences for a large number of people. Our sincere thoughts and sympathy go out to everyone affected.
Comprehensive Western sanctions, while both understandable and justifiable, will have an impact far beyond Russia. In financial terms, too, there are wide-ranging consequences.
We can start the usual way, attempting to allay your fears. For instance: None of our funds have investments in Russia or Ukraine. We have a policy of limiting ourselves to developed countries, primarily to reduce the risk of bad corporate governance.
In economic terms, Russia is no superpower. Using purchasing power parity, Russia accounts for about 3 per cent of the world economy. Measured by GDP in current market prices, which better reflects the volume of international trade, the share falls to 1.7 per cent.
For companies with relations to the Russian market, of course, it may still be devastating. Sanctions will be met with reverse sanctions and selling Norwegian salmon there will not be easier than it has been for the past eight years. Presently, only 1-1.5 per cent of the revenues of the portfolio companies in our equity funds go to customers in Russia and Ukraine.
More people probably worry about the energy market. With the mothballing of the new gas pipeline from Russia, Nord Stream 2, Europe will have a much tighter energy balance, and with further uncertainty about supply in existing agreements, oil and gas prices may be propped up for years to come.
Whereas, in isolation, this is to Norway’s advantage, it is negative for the world economy. The contractionary effect is significantly weaker than during previous oil crises, simply because oil accounts for a much smaller share of global GDP. It will, however, be reinforced by spikes in other commodity prices, like wheat – where Russia and Ukraine produce almost a quarter of the global harvest. In addition, obstacles in supply chains involving Russia or Ukraine can affect price growth in the West and contribute to even stronger inflationary pressures.
So … how did markets react?
Surprisingly composed, I’d say. From the day before the Russian invation to the second day of March, S&P 500 actually rose by 6.3%. Norway’s benchmark, at 5.2%, wasn’t far behind. The German DAX fell by 4.3%, reflecting closer ties to Russia, not least as buyers of natural gas.
Why such a bullish reaction on Wall Street? Probably because the war contributed to a less hawkish stance at the Federal Reserve. Once again, a major setback (not Covid-19 strains, for a change) induced a more benign policy setting, propping up stock prices. This probably also limited the decline in more nervous European markets. As for the Norwegian stock market, you need look no further than the strong oil price to explain the appreciation.
Once again, then, bad news – and this time, it was downright disgusting – was transformed into good news for a lot of investors, at least for the time being. Such is the cynical and paradoxical nature of financial markets.
If there’s a lesson in this? Indeed: Don’t forget second-round, countervailing forces. In financial markets, intuition will not get you all the way to the right conclusion.
Finn Øystein Bergh
Chief Economist & Strategist
Historical returns are no guarantee for future returns. Future returns will depend, inter alia, on, market developments, the portfolio manager’s skill, the fund’s risk profile, as well as fees for subscription, management and redemption. Returns may become negative as a result of negative price developments. This is marketing communication.