value and opportunity

Roughly two years after the beginning of the Pandemic, a lot of people thought that we would now get slowly back to our “normal lives” and chill out. Until Mr. Putin decided that he needs to protect himself by invading Ukraine.

As in the original Panic Journal series, these posts are more “self therapy” than anything else, so please excuse me any irrelevant ramblings.

Maybe one upfront remark: I am an investor, not a political expert. So I don’t know what will happen and speculating about it will not add any value. However one thing is clear: War is always a catastrophe, not justified by anything and in the end, everyone is a loser (or dead). Everyone will pay a price, someway or another.

For good measure, I will add some general remarks about Putin and Ukraine at the end.

Russian stocks: No, no and again no

I have read quite a lot of comments over the past few days that Russian stocks are a “generational buying opportunity” and there are not few “investors” who automatically buy something when it has fallen 50% in a short time.

In my opinion, Russia stocks have been much more roulette chips than investments even before the crisis as Russia is not governed by any kind of law that we know in the west. I had my own experience with a Russian investments in 2014 and stayed away since then from any Russian investment.

The major risk in the current situation is clearly that foreign holders of Russian stocks have the problem of both, being blocked to buy or sell them or receive dividends because of  sanctions from the west and/or the risk that Putin decides that it would be better that his Russian buddies (or himself) should get these shares that are directly or nominally (via ADRs) are held by foreigners. I don’t think that anyone can handicap this for the foreseeable future and things are moving very fast.

And to be honest, I do have some “Schadenfreude” for those investors who for instance bought Gazprom as an “anti ESG no brainer high dividend stock”. Good luck guys, you will need it.

Some remarks on the role of Germany: Putin has us by our balls.

In very simple terms Putin has Germany by the balls through our dependence on oil and gas from Russia. Roughly 50% of our natural gas and 40% of our oil is coming via pipelines from Russia without any short or even medium term alternative.

There is always the counter argument that Putin is depending on the German money, but if things are getting really tough, Putin can last longer than we can and everyone knows this. We would not even make it until Christmas in a cold winter.

In an act of total stupidity, Germany even allowed Gazprom to own 25% of all German gas storage AFTER Putin invaded Crimea in 2014.

I have witnessed it quite often in the past years when discussing the Decarbonization of the German economy, that many people were only focused on short term costs (and profits) and gave no strategic value to an independent energy system.

Even now, I think there is a significant percentage of Germans who would rather sacrifice Ukraine (and maybe even some neighbouring countries), as long as we get our cheap oil and gas from Russia and their tanks dutifully stop at the German border. Many of these people want to believe in Putin’s claim that he is defending himself against the NATO who obviously is the most capable and aggressive military force on this planet. I am extremely ashamed of that short sighted attitude.

While I was writing this, the German Government made a 180 degree U-turn by supporting hard SWIFT based sanctions as well as approving weapon deliveries to Ukraine. This was most likely the result of pressure from the European peers but also a pretty fast learning process. It is also interesting that within a few days , the majority of parties came to this conclusion, including the Greens and the SPD with the exception of the usual AFD axxxxxxx.

I really hate to admit it, but Trump was right in that Europe should not rely on Russian gas and should be able to defend itself conventionally again the Russian aggressors.

The big question is if it would have made a difference if they would have come to this conclusion one or two weeks earlier. The bigger mistakes were clearly made 7 or 8 years ago after the first aggression (North Stream 2).

Some general statements/experiences with regard to stock markets in crisis:

1. The world as we know will most likely (and hopefully !!!) not end here, but there could be significant structural change going forward, resulting in big losers and maybe also big winners (both at a sector/company and country level
2. It can always get worse than we think especially early on in a crisis. “Hope for the best, prepare for the worst”.
3. Looking into the past is no guarantee to know what is happening this time (History rimes but rarely repeats)
4. So far there has been no real panic in the markets. Volatility picked up, but a panic looks VERY different

Some investing lessons from the Covid pandemic panic:

• The Pandemic clearly accelerated some developments that had been already happening (e.g.  faster E-Commerce adoption etc.)
• Companies that benefited had a quite long runway of outperformance. the stock market took some time to recognize the winners and the extent of extra profits
• The real losers already had substantial problems before the crisis (Airlines, Retail)
• Great companies on average managed to do well
• One should take potential Government countermeasures into account
• Some outperformers fell back massively after the things were getting slowly back to normal

Who might profit:

1. Defense Companies

As mentioned above, during writing the post, Germany made a huge U-turn and pledged significant amounts of money for defense. In addition, I assume that most of our Eastern neighbours will do the same. personally, I do not feel comfortable invetsing into those companies but they might do well for some time.

2. Alternatives to Russian commodities

Commodity prices will go up and those who are able to provide these commodities will benefit. Germany and a few other countries will need to diversify their fossil supply sources as quickly as possible and need to fight for global resources, mainly oil and LNG. As in the Pandemic, transport of these commodities will be very profitable as capacity will be constrained.

3. Renewable energy solutions / electrification

To be honest, yesterday I thought how nice it would be to have a solar panel on the roof and a big battery attached too it in order to have some grid independency. I assume that there is already a run on decentralized solutions. People will feel less secure with Gas heating and even oil. Suddenly a slightly higher cost to pay can be justified by a strategic value

There is a high chance that similar to what we have seen in the pandemic, the current trend towards renewable energy and electrification will be significantly accelerated, although I am obviously talking my book here.

Who might lose:

1. Companies with significant business in or exposure to Russia 

Obvious

2. Companies/Countries/sectors depending on Russian fossil fuels

Those are mainly the central and Eastern European countries that rely on the pipelines from Russia. Energy will become very expensive but I also assume that Governments and the EU will “whatever it takes” to keep the most important industries going. But as in the Pandemic, not everyone will benefit in the same way so “non strategic” energy intensive industries will have a problem.

3. Other areas that get crowded out by spending on defense and energy infrastructure

To be seen

4. Companies with negative exposure to inflation

This whole extra spending on defense and energy infrastructure will be clearly inflationary, The question is only to what extent. So any company/sector/industry which is struggling already know will have even bigger problems in the next years.

Portfolio actions:

Looking at the problematic areas above, my main exposures are clearly Nabaltec, which is energy intensive and the Insurance companies which often exhibit negative inflation exposure.

On the other hand, Nabaltec will be a big beneficiary of an even faster move to Electric vehicles. Of my two insurance holdings, FBD might be the weaker candidate. In a worst case scenario, rental cars in central Europe without gasoline will not be a good business (same as car washes) and I am not sure what percentage of sales Richemont does with rich Russians.

So I might manage exposure for those holdings, while increasing exposures to renewable energy and maybe some fossil fuel assets as a kind of shorter term hedge.

I had started last week with a small basket of German Renewable players (Energiekontor, ABO Wind, PNE, 7C Solarparken) for around 1,5% portfolio weight.

Finally, some very subjective thoughts on the Ukraine crisis:

As much as I hope for, a quick, unbloody and face-saving end of the crisis, I think it is extremely unlikely. Yes, maybe Putin could wake up and see his evil ways or he might die because of a stroke and everything is great again, but that is as likely as Captain America and the Avengers coming to the rescue of Ukraine.

Putin needs a big victory to justify his efforts which in my opinion requires at least to take over Kiev. He won’t stop before he has achieved that. There is also a high likelihood of a prolonged war in Ukraine between Russians and locals because the Ukrainians will not just surrender. Although Ukraine is not Afghanistan, controlling such a large land mass will be extremely difficult unless they can seize control over the Ukrainian army.

This will also mean lots and lots of refugees. That’s why massive scale help efforts will need to start now. The only hope is that spring is coming soon and people will not die because of the cold.

I hope (and I pray) that no nuclear weapons or poison gas will be used. However I do think that a “Non zero chance” of cutting oil and gas supplies to the west exists.

So far, at the time of writing, this crisis has unfolded faster and more destructive than anyone thought. I really hope that it doesn’t stay that way but it also makes it hard to be very optimistic.

To be continued……