Fraser Valley – Given recent events in the market, we wanted to reach out to provide you with our view of current events in Ukraine and the effect we believe the war will have on the broader markets and your portfolios.
With Russia’s invasion of Ukraine last night, markets will react with steep losses. If this will cause you jitters concerning your investments we advise that you stay away from business media. They tend to sensationalize what can already be bad news.
The first major military action in Europe in the last 70yrs will undoubtedly shake the confidence of investors and will have opportunists, who’ve planned to deploy “dry-powder”, ready to pounce. We have been warning that markets have been overvalued now for the past year, artificially propelled by historically low interest rates which have seen growth stocks benefit from the promise of price appreciation that will potentially outpace the erosion of buying power. Neglected are the defensive and high dividend “boring” stocks like telecoms, banks, utilities, and dividend growers. This subset of the market has underperformed their growth counterparts with a “paltry” low double digit return.
THE WORLD ECONOMY
Economically, war impedes capital from flowing to opportunities and taking advantage of relative strengths in production. Free Trade, unencumbered Free Trade without government protectionism, generally propels the standard of living of countries and their citizens higher. However, true Free Trade is rarely the norm.
In war, sanctions are typically imposed as the first steps to demonstrate action against enemies. Prolonged sanctions impair the free flow of capital, increase the cost of capital and slow down the pace of economic growth. 
In our previous Annual Commentary, we provided the above chart for the Canadian economy. Canada continued on its trajectory of lower unemployment, higher capital utilization (the amount of assets in a country being put to work) and inflation.
Our view was that the economy would continue to see similar performance going forward, although not at the same pace. The US was also in a similar position. Inflation was increasing, a negative, however Omicron seems to be the last stage of the pandemic signaling we are now moving into the endemic phase (learning to live with the disease like the flu or cold). Both the Fed and Bank of Canada communicated their intention to move on rates at their next sit-down.
The Ukraine War throws a curve ball into these plans. It’s our view that behind the scenes they will use the excuse to push any interest rate increases off, as their concern will now be a potential recession.
Due to myopic green policy initiatives, oil production and supply have been impaired. In the US, “shale” is a dirty word, almost as dirty as “tar sands” is in Canada. This has caused fewer barrels to be produced relative to the potential, which has resulted in increasing prices. Oil will continue to hit new short-term highs as Russia is the 3rd largest producer, accounting for 11% of world production.
These regulations, and the shock of war, adding a risk premium to oil, will weigh on economic performance. The result of higher oil prices will be to have a similar effect as increasing interest rates; they both will slow the economy. This will be seen as a variable previously not factored into the analysis, which will cause additional headwind to addressing inflation.
PORTFOLIOS ANB THE MARKETS: Buckle up.
This morning’s trading will result in some anxiety for you. Markets will drop over the course of the next week as the full extent of fighting unfolds. Historically, Ukraine has suffered at the hands of Soviet/Russian power. A lot of pent-up bad history plagues the relations of these two nations. This conflict will not resolve quickly
How the SP 500 has historically performed around major geopolitical shocks. Reference: Truist
The above chart analyzes the affect that war has had historical on the SP500. Out of the last 12 major geopolitical events, spanning the past 80 years, war has tended to propel the markets higher in both the immediate (short term – 1 month) and 12 month time horizons. As you move further out, the probability of a positive return increases from 50% to 75%. The average return in one year is close to 9%. The average after one month is 1.3%.
How will this affect your portfolio? Immediately, you will see negative returns on all your positions. This is the overreaction of sentiment that we spoke of in our Annual Commentary, which will push markets lower. We prepared for what we thought would be a down year by raising cash balances in portfolios, similar to our call prior to the pandemic.
*Average across all portfolios regardless of mandate.
Remember, when you look at your portfolios, that we own those “boring” defensive, dividend growth names that no one wanted to own. Will people stop going to the bank? Will you restrict your use of data on your cell phone because of current events, or will you consume more data watching news or reading articles? Will you stop heating your house with Natural Gas transported through an Enbridge pipeline?
When it concerns the Equity allocation of your portfolio, the names we own are grocers and corner stores: Loblaws, Metro and Alimentation Couche-Tard. We own military suppliers like Air Boss of America. We own food manufacturers and commodity suppliers: Maple Leaf Foods and Algoma Central. Will you stop going to the grocery store? Will nations stop military procurement? Will commodities no longer be shipped to manufacturers? Of course not.
Lastly, our Alternative Strategies focus on investments that demonstrate stable prices, or prices that appreciate when there is conflict. Names such as Barrick Gold, iShares SP/TSX Gold ETF, Agnico Eagle Gold, Kinross Gold, Wheaton Precious Metals. We also own student and residential housing in Ontario and Seattle. Utilities also feature prominently, and they incorporate a covered call strategy which benefits from high volatility as options premiums increase substantially.
We understand that the next few weeks may be uncomfortable as an investor. You and I will see drops in our portfolios – remember we invest along with our clients. However, history will play out like it always has. Just like when I put my first trade in on a stock when I was a high school student during the World Trade Centre Bombing, when I invested clients during 911, The Iraq War, The Afgan War, The Great Recession and recently in the Pandemic, sentiment will cause panic selling but there will be some very good opportunities waiting.
We’re ready to deploy funds when we see the right opportunity, we’re ready to sell stocks we think will underperform given changing circumstances and we’re ready for your call if you wish to talk further. Please don’t hesitate to call.
Should you have any questions related to our services, your account, or this commentary, please do not hesitate to contact your Portfolio Managers Mark Taucar (905)-715-2260 or John Lombard (905)-484-3482.
This communication is intended for information purposes only and does not constitute an offer to sell or a solicitation to buy securities. No securities regulatory authority or regulator has reviewed or assessed the merits of the information provided. This communication is not intended to assist you in making any investment decision regarding the purchase of securities. Rather, Accilent Capital has prepared relevant documents for delivery to prospective investors that describe certain terms, conditions and risks of investment and certain rights that you may have. You should review all relevant documents with your professional adviser(s) before making any investment decision.
This report may have forward looking statements. Forward looking statements are not guarantees of future performance as actual events.
While every effort has been made to ensure the correctness of the tables, graphs – all data. Accilent Capital does not warrant the correctness, completeness or accuracy of financial data in this publication.
Should you have any questions related to our services, your client’s account, or this commentary, please do not hesitate to contact your Portfolio Managers Mark Taucar (905)-715-2260.
