Outlook: It is a long way to go…
I think that every equity strategist who wanted to publish a note on the impending economic slowdown has done so by now. The stock market however keeps bouncing on every bit of good news from Ukraine. When will the war end? From the war maps shown on Russian and Ukrainian YouTube posts it looks like to claim that Donbass is “free at last” the Russian army may have to move the front by 50 to 100 kilometers. Even if we assume that they can steadily advance by 2 km per day, this may take 25-50 days. What will happen next? I expect a relatively speedy acceptance of Ukraine into the EU, and following that, a massive program of rebuilding Ukraine with EU funds and technical assistance. It quite possible that in ten years Ukraine will look a lot like Poland.
I think that there is a lot of support for the Ukrainian cause in the West and “the Marshall plan for Ukraine” will follow. Tragically, no amount of money will compensate for the loss of life on both sides of the war. The immediate economic consequences for the US and the EU will be bad: inflation, shortages, and visible economic slowdown, driven for most part by high commodity prices and attempts to combat price inflation with a tight monetary policy. In this scenario, Russia without access to Western capital markets, technologies, and saddled with sanctions and import restrictions, will be the biggest loser.
Like many observers I thought that probability of the Russian invasion is quite low. I simply could not find any good reason for Russia to invade a smaller neighbor. President Zelensky said in a recent interview that by trying to destroy Ukraine the Russian government is shielding its electorate from the spectacle of prosperous and democratic Ukraine. Zelensky may have a point: the post-war economic revival in Ukraine will present a political problem for the Russian government.
Putin’s approval ratings.
According to a Russian pollster Levada-Center Putin’s approval rating has spiked from 70% to 83% over the past couple of months. From this we can conclude that the war in Ukraine has boosted patriotic sentiment of the survey participants. Historically Russia was (and I think still is) a paternalistic state, where loyalty to the government brought benefits. As a result, people who are loyal to the government are much more likely to participate in opinion polls than people who are not as loyal, thus introducing a self- selection bias. Polling organizations are not immune to political pressures and may not be able/willing to implement proper adjustments.
Weekly stock ideas
Rio Tinto (RIO). The company has unique exposure to aluminum among large-cap miners. I think that supply shortages in aluminum will persist, because of import shortages of alumina in Russia. The company stands out for high ROCE and high shareholder distributions.