Telemus Weekly Market Review February 28th - March 4th, 2022
Stocks trended lower this past week as the S&P 500 fell –1.3%. The action, however, was more pronounced outside of domestic stocks, with emerging market equities pressured as the MSCI Emerging Market index lost -2.3%. Stringent financial sanctions on Russia had a significant impact to markets and led to a combination of forced liquidations and fear based speculative trading.
Newly imposed sanctions by western governments, along with supportive actions implemented by corporations combined to create a chaotic environment for emerging market investments. The Moscow Stock Exchange did not open on Monday and remained closed throughout the week. For investors owning Russian equities, they initially had the option of accessing liquidity through alternative exchanges for Russian stocks that were dual listed on multiple exchanges. However, as the week progressed and the Moscow Stock Exchange showed no signs of opening, liquidity dried up regardless of the venue. While there remains no stated timetable for the Moscow Stock Exchange to open, the Russian government has indicated that it will not be open to foreign investors once trading resumes. Late in the week, MSCI, the leading emerging market index provider, made the decision to remove Russia from the MSCI Emerging Market index given that these stocks are not presently investable. Russian equities had accounted for roughly 3.6% of the index at the end of 2021, and as of Thursday, MSCI assigned a value those equities to be 0.00001. This change effectively wrote down the entire value of the Russian equity component of the index.
This outcome created a challenge for emerging market investors. Early in the week active funds had to choose between selling Russian equities at deep discounts in exchange for taking liquidity while they could get it or holding through this episode based on the belief that shares would ultimately be worth more than their quoted share prices but accepting that fact that they may be impossible to sell for a period of time. While emerging markets are known for episodes of volatility, writing down an entire country’s economic value to nearly nothing is unusual.
Outside of emerging markets, ambiguity around sanctions and how they may impact Russian and Ukrainian oil and gas supplies led to a sharp uptick in commodity prices. Oil continued to escalate with the price of West Texas Intermediate crude oil rising 26% and hitting $115, its highest level since 2008. One potential long-term outcome of this conflict is likely to be a reallocation of supply chains as nations and corporations look to have less concentration in commodity supplies from a single country. The conflict may ultimately accelerate the demand for added infrastructure to support the use of liquified natural gas. While this could result in an eventual transition of natural gas moving from a regionalized commodity to a global commodity, the infrastructure for liquification and gasification facilities will take time and capital to build. Natural resource equity stocks could be positioned to benefit, over the long-term, from a more global market.
An additional ramification from this conflict may be an impact in how the dollar is viewed as a global reserve currency. The significance of the financial sanctions on Russia may lead to some nations questioning their dependence on dollar-based trade and they may, over time, elect to diversify their national currency reserves. This could lead to additional currencies, such as the Chinese renminbi, growing into reserve currencies. Other stores of value, such as gold, may return to favor as sources of currency reserves. In our opinion, Cryptocurrency, which at times has been floated around as an alternative currency, remains too volatile to be considered in this conversation.
As we reflect on Russia’s invasion of Ukraine and the actions that have transpired because of it, we believe this could serve as a notable moment that may shape long-term views around geopolitics and economics for years to come. The situation around the Russian/Ukraine conflict remains fluid and we expect conditions to develop and volatility to remain for the time being. Looking out longer-term, we are beginning to recognize some potential long-term ramifications that may evolve in the years to come.
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The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 11.2 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 4.6 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization. The MSCI Emerging Markets Value Index captures large- and mid-cap securities exhibiting overall value style characteristics across 27 Emerging Markets (EM) countries. MOEX is the Moscow Exchange and index that tracks the performance of the 50 largest and most liquid stocks across 10 sectors in Russia. An index is not a security in which an investment can be made, as they are unmanaged vehicles that serve as market indicators only and do not account for the deduction of management fees and/or transaction costs generally associated with investable products. Advisory services are only offered to clients or prospective clients where Telemus and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Telemus unless a client service agreement is in place. All composite data and corresponding calculations are available upon request.