Investing is like driving at night: you have to have lights and they have to be, at least, road lights. The one who drives at night with the position lights ends up having an accident. The accident can be buying too expensive in times of euphoria or underselling in a panic. You cannot invest without perspective.
That does not imply that you have to have a “crystal ball”, that excuse that is used so much by those who do not want to “get wet”. You don’t have to have a crystal ball: you have to make a good calculation of probabilities based on the available information.
Let’s assume for a moment and without the prejudice of having to do the same as most -remember, in the markets the majority is wrong more than right– that the war, at least in its current “format”, will not last as long. And that one thing is that the sanctions will last a long time and quite another that Putin needs to invade and control all of Ukraine to achieve his objectives. Besides, given what it’s costing him every inch, there’s a good chance that’s not what he intended.
In the calculation of probabilities we cannot rule out that, once he has surrounded the main cities and destroyed a large part of Ukraine’s military capacity, he decides to sit down to negotiate from a position of strength. By then it will not only have “demilitarized” Ukraine by force, but, by the same expeditious method, its “neutrality” will have been ensured. As for its other two objectives, the annexation of Crimea and Donbas, in practice it already has them.
In the short term, what usually happens on these occasions will happen: that what fell the most is what rises the most
As for the Ukrainians, they are admirably brave, but no military expert will tell them that they can win this war. And on top of that they are subject to the blackmail of seeing the suffering of their compatriots, trapped as hostages in the main cities, without electricity, water or food. So we wouldn’t rule out that they might prefer a bad deal to the destruction of their country.
So let’s suppose that we enter a new scenario, either of guerrilla warfare or of negotiation, but that we will call the “day after” (of the war as we know it now). What will that scenario look like in the markets?
We must distinguish between the short and medium term. In the short term, what usually happens on these occasions will happen: that what has fallen the most will be what rises the most. Probably not everything, since investors know that there are assets, sectors and countries that do not benefit from the new economic scenario.
And above all, beware of those who were already touched by the expectation of rising interest rates, because the war may be over, but not the expectation of rising rates. Now it will be higher because the problem of inflation has increased considerably.
Looking at the medium term, the key is sanctions and their most important consequence, which is none other than inflation. Russia is not a global economic engine and I think the risk of stagnation because of it is exaggerated, but the inflationary effect of sanctions is not exaggerated.
It is very likely that one day the war will end, but it is certain that the sanctions will remain. And they will not be quickly eliminated, because they will be part of any negotiation. And the negotiations are long.
The day after the war, investors will realize that the key is to spot the assets, sectors and countries that benefit from inflation.
The day after the war, investors will realize that the key is to detect the assets, sectors and countries that benefit from inflation. And I am not referring to raw materials, which have already discounted the worst scenario, but to, for example, betting on the fall in the price of European bonds.
Because the day after the war, the ECB will have to wake up and redouble its efforts to fight inflation. And of course stop buying bonds. And all this obviously has a very clear loser: the price of bonds and, with them, the valuation of fixed income funds.
The day after the war, investors will also realize that bonds not only do not give a good coupon, but also lose value.. In fact, the day after the easing in stocks is likely to coincide with a sharp drop in bonds. That is when investors will turn their eyes towards the dividendswhich also have the advantage that they are variable and can rise even if inflation rises.
It is common for companies to increase the dividend to alleviate the effect of inflation and not lower the real return on investment. But of course, we will have to go where the dividends are high, stable and, if possible, growing.
The day after the war, or if possible before, it will be necessary to analyze the economies that benefit from the isolation in which Russia decided to settle in exchange for invading a sovereign state. In business, many times the misfortune of one is the happiness of another. In this case others, because there are several and some much less obvious than it seems. By the way: we will talk about all this next Thursday in an open session on the opportunities generated by the current market scenario.
***Victor Alvargonzález He is a founding partner of the independent financial advisory company Nextep Finance.