Investors looking at long-term opportunities beyond the “noise” created by the combination of inflation and the war in Ukraine need to consider the type of world that is likely to emerge going forward.
“As markets look to price in change, there will always be opportunities,” said Natasha Ebtehadj, portfolio manager, global equities, at CTI.
“The benefits of active management allow us to pivot towards stocks where we believe too much risk has been discounted, and we remain focused on these opportunities, finding companies that are best suited to adapt to the new landscape,” she added.
For example, while oil, natural gas and wheat have been widely discussed, the world is also reliant on Russia for some other commodities. These include palladium and neon, which are key materials in the production of semiconductors and cars. Further, titanium is essential to the aerospace industry.
“We had been starting to see signs that the semiconductor chip shortage that plagued the auto industry last year was starting to ease,” Ebtehadj explained. “This latest supply shock may well delay the recovery in chip production yet again with knock-on effects for every product that requires them.”
A three ‘Ds’ future?
In particular, Ebtehadj highlights three themes that will likely endure beyond the initial inflation spike: decarbonisation, defence and deglobalisation.
For the first of these, she believes the war in Ukraine may well do for energy transition what Covid-19 did for cloud computing.
“Necessity is the mother of invention, and we would expect to see the pace of decarbonisation become supercharged, especially in Europe which relies heavily on Russian energy imports,” said Ebtehadj.
The EU wants to reduce its dependency on Russian gas by two-thirds before the end of the year. This can be seen from the European Commission recently releasing the REPowerEU2 plan in response to the energy security problem.
Accelerating the build-out of renewables such as wind, solar and green hydrogen will help go a long way towards achieving these targets.
Meanwhile, defence spending is another area that CTI expects to see an uptick for many years to come. “Not only will we see this on a governmental level, but private companies will also likely spend more on cybersecurity,” Ebtehadj explained.
Although cyberwarfare is a relatively new facet of broader physical conflict, it is realistic to think that it may increasingly be unleashed on private companies given how they have been brought into the conflict via boycotts of Russia.
As a result, shoring-up the protection of firms’ digital assets is likely to be another trend accelerated by the war – and one in which cybersecurity service providers will play a key role.
Ebtehadj is also backing the deglobalisation theme. This trend began under the tenure of former US president Donald Trump amid the US-China trade war and was exacerbated by the pandemic.
In the near term, she sees continuing supply chain difficulties requiring further diversification of suppliers and production facilities, as well as better alignment of production and demand locations. Over a longer time horizon, the use of economic sanctions against Russia will likely have ramifications for the global economy.
“It is difficult to imagine China, which currently has $3.2trn of forex reserves, a large percentage of which is likely to be dollar denominated, not wanting to extract itself from this dollar exposure given its own geopolitical tensions with the US,” explained Ebtehadj. “Along with inflation, this has the potential to create a scenario where the nominal cost of capital continues to edge higher.”
