A Note to Investors on February 24, 2022
In a recent Market Insights, I commented how KOCAA believed that Putin would not cross the Ukrainian border until after the Olympics. The closing ceremonies are finished and Putin, using the pretext of protecting Russians in two breakaway territories, has attacked Ukraine and the press is expecting Kyiv will fall by this evening. Sad.
It has been an interesting day as stocks fell precipitously this morning to rally back into positive territory this afternoon after President Biden announced significant sanctions that will make capital raising and global transactions very difficult for Russia. In addition, President Biden announced that the US was imposing personal sanctions against some of Putin’s inner circle, four additional Russian Banks were sanctioned, export controls were put in place and Russian companies are being blocked from raising capital from U.S. and European sources.
The giant question remains why did Russia do this? In any conflict, trying to understand the perspective of one’s adversary is important. The North Atlantic Treaty Organization (NATO) started in 1949 with 12 original members. The end of the Cold War saw greater expansion to the current number of 30 members and the list of member states now includes Poland, a neighbor of Ukraine. Putin seems to revel in his view of the “glory days” of Russia and has lamented the actions of his predecessors in allowing former Soviet satellites to exist as independent countries. I don’t represent that I have any unique insight into the workings of Putin’s mind. However, it is pretty logical to reason that having NATO expand to include Ukraine was too close for Putin’s comfort and he desired a reasonable buffer. From some things I have read, it seems that Putin believes that Russia has been disrespected by the West since the fall of the Soviet Union and wants safety and security for Russia. No matter how warped one may think he is when you put his actions into that context, I can at least understand what Putin is up to. I think it will ultimately backfire on Putin and Russia and it is an absolute tragedy for the innocent people being killed, hurt, and displaced. The cost for Russia from the economic sanctions may be quite devastating for an already economically challenged country.
My personal view is that a full-scale World War III is an unlikely outcome because of the interdependence of countries within the global economy. Western Europe may need Russian natural gas, but Russia needs currency from Western Europe to survive. The U.S. and China antagonize one another and Taiwan is certainly at stake at the moment, but China needs the U.S. market to sell exports and the U.S. certainly likes importing the low-priced items from China. These are oversimplifications to be sure, but you get the point. The major caveat, and there is always at least one, is the potential mischief from authoritarian regimes that can certainly disrupt any logical linkages that exist between countries. Ultimately Putin wants a buffer and security for Russia and he wants to assure his position as the President.
At times like these, investors are looking to do something. People want to do the prudent thing and take some level of action. Sometimes, and we believe that this is one of them, the best thing to do is to do nothing at all. Trying to time the moment when things will be all better is impossible. Today, we staged a major relief rally off the bottom because investors are focused on sanctions. If China rattles its saber against Taiwan or Putin escalates from here, there could be another leg down. However, if there is a negotiated peace, we are back to considering economic fundamentals. We continue to espouse long-term investing and evaluating your asset allocation at regular intervals. If you are overweight equities after a particularly good year, “let it ride” is not our preferred strategy. Rebalancing and reassessing one’s portfolio are better ways to focus. At the same time, at times of stress, wanting to get out of the market because of perceived pain can soothe fear, but one always needs to figure out what market level or event needs to take place in order to reenter the markets.
We believe this situation will get better and find a way forward with hopefully a peaceful resolution. This will not be a linear situation with all bad news and then all good news. We believe it will be a bit bumpy, but we will find a way forward. At the same time, my prayers this evening will be focused on the innocent Ukrainians that never asked nor wanted Russian “intervention” or “protection”.
This commentary has been prepared by Knights of Columbus Asset Advisors for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults, (5) changes in laws and regulations, and (6) changes in the policies of governments and/or regulatory authorities. The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding any holdings is not a recommendation to buy or sell any security. Fund holdings are fluid and are subject to daily change based on market conditions and other factors.
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