Almost overnight, the world has turned upside down. A far more militarized Germany, Sweden supplying 5000 anti-tank weapons to Ukraine, Switzerland breaking a long tradition of neutrality: these are just a few of the unthinkables set in motion over the past few weeks. 

Like so many others, we have been horrified watching events unfold in Ukraine. The values of democracy, freedom and sovereignty are now under siege. 

To state the obvious, the world is witnessing a hinge moment in history. Putin’s unilateral decision to invade Ukraine has pushed global political and economic systems into uncharted territory. Most did not see this coming. But what has been simmering at the wilder edges of post-Soviet Russia is now at full boil, spilling over into all corners of the world. 

Of course, the past and present are never far apart in Russia. The country has a long history of failed wars. Regime changes always follow. The drawn-out war in Afghanistan contributed to the collapse of the Soviet Union in 1991. Defeat in WWI led to the Russian Revolution in 1917. The list swells as one looks back further in history. 

Putin missed this in his calculus. And, while the sudden and brutal invasion shocked nearly everyone, the Western response has been equally shocking. Sanctions have sunk Russia’s economy into an immediate depression. Hard-won freedoms and connections to the outside world have disappeared. International flights and sporting events have been cancelled. Before February 24th, the Russian middle class had become accustomed to a world complete with Starbucks, iPhones and holidays in Spain. That existence is over. Putin has again imprisoned Russian citizens behind an iron curtain.

Investing During Wartime

How should investors position for all of this? In war, there are few winners. Yet the opposite is true in the investment world: there are clear winners and losers. This crisis will be no different. 

Many investors point out that the Russian economy is a small player on a world scale. On the surface, this is true. Russia’s GDP is US $1.48 trillion, while Ukraine’s economy is even smaller, with GDP at US $155 billion — taken together that comprises less than 2% of global GDP. Even if the war and sanctions cause a severe recession in both countries, the direct impact on the rest of the world will be minimal.

Yet the best investors always look at the second and third-order effects of major macro events. Under this view, Russia’s economic isolation will have far reaching and dramatic impacts upon the world. This stems from its role as lead supplier of several key commodities (12% of crude oil production, 25% of copper supply, etc.). Our investment team is closely monitoring these developments with the following key perspectives:

• The early winners in this war have been nation’s with a similar economic makeup as Russia.  For example, Chile’s stock market, loaded with copper companies, is up 17% year-to-date in US dollar terms (a sharp contrast to the technology-heavy Nasdaq, which has fallen -19%). We have been invested in these countries and view them as “hedges” for our clients against further Russian aggression. 

• A new Europe has also emerged from the tragedy of Ukraine. The significance of the sanctions campaign goes well beyond straight economics. Rather, the coordinated response points toward a unified European Union … a collective rally around a common set of ideals and principles. The EU’s three-decade complacency is now over. France has a powerful ally in Germany. Together, they will no doubt seize the opportunity to push an agenda forward that includes vast amounts of capital spent on defense and energy. In fact, geopolitical rivalries always act as spurs for massive investment in infrastructure, technology and other innovations. Growth will surprise on the upside here, providing several areas of investment opportunity.

• Russia’s invasion has accelerated many of the Super Trends that were already underway. In fact, the gap between the investment winners and losers is steadily widening. In recent Forstrong reports, we have been closely tracking an ongoing investment regime change — away the low inflation, slow growth malaise of the post-2008 period to a higher inflation, higher growth and, yes, higher volatility period. Under these new macro conditions, a “great rotation” is already underway, favouring the less glamorous, out-of-favour international value stocks at the expense of growth and technology stocks. What’s more, many of the traditional portfolio hedges like government bonds are no longer providing the protection they once did. This crisis is a case in point. We have positioned clients for all of the above.

Where to next? Markets are now experiencing a panic moment that shares many similarities with the onset of the pandemic. At times like these, investors need to strike the right balance between defense and offense. 

At Forstrong, that means managing emotions, avoiding the headline noise and, above all, sticking to our investment process, which has reliably helped navigate our clients through many other hazardous world events. More than ever, wide-angle global perspectives will be crucial to discern the path ahead and set the right investment roadmap. Clients can count on us that this approach will continue.