It is with dismay and concern that we are writing about the invasion of a sovereign European nation. The invasion of Ukraine by Russian troops has come as a shock to the international community. In fact, it came as a surprise to most market participants, as it did to us, that such a warlike attack in the middle of Europe so suddenly became a reality.
Above all, this is a clash of two worlds. It is also an attack on the European value system, with the aim of gaining geopolitical influence on the Eurasian continent. Ukraine - on its way to becoming a more Western-oriented society - was attacked on a pretext.
The information campaign on both sides is taking on dimensions not experienced for decades. As outsiders, the developments on the ground are scarcely comprehensible, let alone verifiable. The coverage is polarising the situation further and is not helping to ease tensions. On the contrary, it is remarkable that the West, with the mobilisation of global public opinion and business, is united in the highest degree of partnership and unity against these warlike actions.
It is the first time in decades that the Western world has united in condemning Russia's actions so strongly and imposing strict sanctions to hit the Russian economy hard in the short term and build up pressure from within. Europe's long underestimated security requirements have also been rediscovered.
While at the beginning of the year capital markets were still worried about issues such as the maximum number of interest rate hikes in 2022, and the pandemic was only slowly receding into the background, the focus of market participants shifted abruptly with the outbreak of the war.
Financially, we are seeing a further intensification of supply chain issues and crazy, unpredictable price developments in global commodity markets, leading to rising energy prices and significant losses on risk assets. Inflation concerns are taking over as the increase in oil and gas prices, which did not just start as the conflict escalated, is only fuelling inflation. The additional risks to global economic growth present monetary policymakers worldwide with the dilemma of a stagflationary environment. While Russia and Ukraine's direct share of global GDP is less than 3 percent, and Russia has already been increasingly isolated since the annexation of Crimea in 2014, the indirect consequences cannot yet be accurately assessed
In the context of highly volatile markets, it is difficult to separate the short- to medium-term assessment of the market from the real economic impact on the development of corporate profits in the medium to long term. The stock market is a discounting mechanism, which currently is not producing good results due to the new, unknown uncertainty factors.
Over the last two months, the market experienced tremendous sector rotations, due to the new realities of a post Covid-19 world, the expected interest rate rises, and now due to the geopolitical escalation. The partly undifferentiated sell-offs in these macro-driven markets resulted in massive distortions and discrepancies in share price developments. Single stock selection is challenging for an active fund manager in such a highly simplistic environment. However, it is precisely in such moments that opportunities also arise, although they often only appear obvious in hindsight. Here it is important to remember the long-term return potential of the stock market.
We see the willingness of the West to oppose these recessionary developments vehemently, as in our view the preservation of the Western value system is also at stake here. In this way, the European states are prepared to make the greatest possible efforts to this end. The democratic nations are taking this very seriously.
Once the situation improves, the potential for the equity markets at these levels is also significant. We see extraordinarily low valuations in many stocks. In general, a certain degree of rationality is a minimum requirement for prudently weathering adverse phases such as this one. This was demonstrated most recently in the spring of 2020, when Covid-19 caught the entire world virtually unprepared. The experience of how our portfolio companies dealt with the pandemic - with agility and flexibility - gives us confidence that current and future challenges can also be mastered. The recent results of numerous companies have demonstrated impressively that they present very solid results even in difficult conditions.
Authors: Olgerd Eichler, Evy Bellet, Alexander Dominicus und Alexander Lippert, Portfolio Managers for the MainFirst Top European Ideas Fund & the MainFirst Germany Fund
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