Below is the article of the new issue of strategy weekly “Il Rosso e il Nero” edited by Alessandro Fugnoli, Strategist of Kairos.
The first casualty of war, it is commonly said, is the truth, overwhelmed by propaganda. The second victim, he adds
Russell Napier, is the solidity of the currency. In these hours we speak again (and with greater conviction than in recent months) of stagflation as a result of the supply shock produced by sanctions against Russia. The seventies, which in 2021 had been evoked amid much skepticism by those who had lived or studied them, seem even closer now that an energy crisis risks adding to the structurally inflationary fiscal and monetary context created by the response to the pandemic and the supply bottlenecks caused by deglobalization.
And yet, of the two misfortunes that stagflation evokes, stagnation and inflation, the second continues to seem more probable than the first, at least in America, while in China neither one nor the other is in sight. The actual stagflation is currently a risk for Europe alone. A risk, not a certainty.
The fog of war can lead to a distorted reading of reality.
On the first day of the conflict, February 24, a rapid Russian conquest of Ukraine was envisaged. In the following days there was talk of a substantial Russian defeat, given as already evident.
Now a long and destructive war is envisaged, with a sort of Pyrrhic victory for Putin and a walled Russia alive for the rest of his days. Three scenarios in just one week.
Then there are, alongside the military one, other dimensions that are difficult to ponder. The diplomatic channels remain open and at any time, at least on paper, a window could arise, if not of peace at least of truce. Alternatively, a regime change in Moscow could mess everything up and open up new scenarios.
A further level of uncertainty surrounds the sanctions, not so much for the damage inflicted on Russia, which are absolutely certain, but for the repercussions on the rest of the world. The scope of the sanctions is not clear. It is not clear if there will be others. Finally, it is not definable the extent of the so-called self-sanctionsor rather the preventive renunciation by the corporate world to do business with Russia to avoid risks or to avoid boycotts by pressure groups.
In particular, it is not clear how long the Russian gas tap will be kept openwhich for now flows regularly towards Europe in an even higher degree than in recent months in exchange for euros that continue to flow in the opposite direction.
For the time being, future pressure for further sanctions is likely to focus on oil rather than gas, especially on the US side. All these uncertainties lead us not to suggest a complete overturning of portfolios yet.
On the other hand, however, the chances that a standard 2021 portfolio will emerge unscathed from the 2022 turmoil are not high enough to allow the luxury of doing nothing. It is therefore better to make progressive adjustments and add raw materials whenever possible (energy, metals, fertilizers, agricultural commodities), replacing cash and part of the zero-risk bonds with gold.
Gold, in this context, seems preferable to cryptocurrencies for two reasons. The first is that the freezing of Russian foreign exchange reserves held abroad as a result of sanctions will cause some central banks (probably the Chinese one) not to hold new foreign exchange inflows into government bonds more than necessary and to accumulate gold instead. and perhaps, one day, raw materials to be kept under lock and key at home.
The second reason is that cryptocurrencies, little loved in recent times by the Russian government, are now seen by Moscow in a new light. Precisely for this reason, however, the crypto world could be subject to restrictions in Western countries in the future.
The equity component, for its part, must be addressed in a defensive sense. Here, however, a distinction must be made between America and Europe.
If in America we assume a continuation of growth driven by the exit from the pandemic and by a greater internal production of energy sources to replace those currently imported from Russia, defensive means banks (rates will go up anyway), value, cyclicals and utilities. In Europe, where the growth of the economy will be more penalized, we must instead be more selective by choosing the most solid banks and using caution with cyclicals and energy-related utilities, which could be pushed by governments to favor users over shareholders.
With a Fed that will continue to turn a blind eye to inflation and an ECB that closes both of them, China, with its low inflation, strong exchange rate and positive real yields on its government bonds, is attractive for the fixed income component of the portfolio.
However, it must be remembered that American toughness towards Russia aims, in addition to imploding a potential strategic ally of China, to send Beijing a powerful message about what will happen the day when the People’s Liberation Army will set foot in Taiwan. In short, anyone who invests in China can sleep peacefully if he takes a picture of the fundamentals, but he must know that the war on Russia is only the first chapter of the centuries-old war on China.
China, for its part, is perfectly aware of the delicacy of its situation and moves with great caution.
If on the one hand the Russia of raw materials would be perfectly complementary to the China of manufacturing and technology, on the other hand the risk of accelerating too much the separation with the West (at a time when Chinese exports are so important to balance domestic problems) it will cause Beijing to keep a very low profile and to do everything to respect the sanctions against Russia.
Staying in Asia, as well as a pro-Chinese but also pro-Russian Pakistan, India should be kept an eye on, as it tries in every way to keep the door open to Russia. Those who have focused on India in recent years considering it a country that has now entered the Western orbit will do well to reflect on the fact that India is a fundamentally and staunchly nationalist country and that everything else is contingent for her.