Investors steel themselves as European conflict escalates

Business and investing: With inflation, supply chain woes and a global pandemic, investors must be wondering what more could go wrong this year. In reality, quite a lot.

In exile in Switzerland shortly before the start of the Russian revolution, former Soviet Premier Vladimir Lenin reputedly said: “There are decades where nothing happens; and there are weeks where decades happen.”

Russian President Vladimir Putin’s decision to invade Ukraine, unleashing the biggest military conflict in Europe since the Second World War, caught many investors off guard, making Lenin’s quote seem particularly apt for a year that is only into its eighth week.

Coupled with rapidly rising inflation, supply chain disruption, labour shortages, rocketing energy prices and the continued fallout from a global pandemic now into its third year, investors must be wondering what more could go wrong this year.

In reality, quite a lot.

If there’s one thing markets crave more than anything else it’s certainty, and right now there’s little of that to be found anywhere.

Central bank accommodation, a bedrock of the recent rally, is fast disappearing, business margins continue to be eroded as rising costs eat into company profits, consumers are becoming increasingly nervous as inflation expectations push higher and supply chain disruptions on a scale few could have ever contemplated even 12 months ago are causing havoc for businesses reliant on efficient delivery systems.

And now a war in Europe, involving one of the world’s most significant nuclear powers with an end game that is still yet undetermined, raises the prospect of additional geopolitical uncertainty, costs increasing and further supply chain disruptions as sanctions on Russia begin to take effect.

As well as supplying about 40 percent of Europe’s natural gas and 30 percent of its oil, Russia and Ukraine combined account for a third of global wheat production. Ukraine is also the world’s biggest exporter of sunflower oil, the second-largest producer of barley and the fourth-largest producer of potatoes. Both countries are also rich in metals and minerals.

But amid the chaos of the last week, spare a thought for investors in Russia who witnessed one of the biggest collapses in financial history last Thursday when the dollar-based RTS share index plunged 38 percent – equivalent to the NZX50 falling more than 4500 points from its current level. Russian bonds also slumped, and the rouble crashed to a record low against the dollar.

The ferocity of the market plunge suggests the vast majority of Russian investors were as shocked by Moscow’s decision to invade Ukraine as the rest of the world.

No one, perhaps with the exception of Putin, expected to see cruise missiles fired into Europe in a hostile attack in 2022, and it marks a significant turning point for investors and a new low in European geopolitical relations.

On Thursday, the New Zealand sharemarket recorded its biggest one day fall since the March 2020 sell-off with the NZX50 slumping more than 400 points (3 percent) to 11,732, later recovering about half its losses on Friday finishing down 1.8 percent for the week. That’s now seven losing weeks out of eight so far this year.

Stocks rallied in the US after initially slumping as much as 5 percent on Thursday (US time) as hedge funds unwinding short positions (betting the market would fall) accounted for much of the gains as well as the tantalising prospect of Russia’s actions potentially forcing central banks to pare back or even delay planned rate hikes and the removal of monetary accommodation.

The RBNZ, which announced its latest 25bp rate hike the day before news of the invasion emerged, did not seem particularly swayed by events in Europe. However, if oil prices continue to surge higher, reaching upwards of $120 a barrel as some analysts have predicted, that would likely force a review of the proposed interest rate track at the next monetary policy review in April.

Oil prices eased after the White House confirmed that Russian oil and gas companies would be excluded from a number of new sanctions against Moscow in an effort to try to contain further price rises. Brent Crude oil futures fell from US$106 a barrel to close at US$98pb, though for the week prices were still up more than 5 percent.

Gold had a rollercoaster week. After surging to a 12-month high of US$1974 an ounce on news of the Russian invasion, investors just as quickly reversed their positions as markets rallied sending the precious metal spiralling lower to US$1878/oz resulting in an intraday trading range of US$96 or 5 percent between its high and low for the day. For the week gold finished down 0.5 percent at US$1889/ oz.

Cryptocurrencies also saw plenty of volatility with Bitcoin ending the week up 0.8 percent at US$38,700 after trading as low as $34,350 at one point, while Ethereum gained 3.7 percent at US$2700.

The NZ dollar added to its gains in recent weeks closing up 0.7 percent to 67.45 US cents. For the month the kiwi is up 2.8 percent.

Earnings summary

Somewhat overshadowed by the turmoil in financial markets arising from events in Europe, many of New Zealand’s leading listed companies reported their earnings results to the end of December this past week (full table of results below).

While there were few surprises, a few results delivered good and bad news for investors.

Chorus raised its pre-tax earnings guidance for the full year to between $665m and $685m from $640m to $660m, and full-year dividend guidance to 35 cents from 26c. An interim dividend of 14c per share will be paid out on April 12. The company also announced plans to undertake a $150m share buyback over the next 12 months. Its shares traded as high as $7.47 following the announcement but finished the week at $7.15, up 5.5 percent.

A2 Milk, despite announcing a 50 percent decline in its half-year profit to $59.6 million, gave investors some cheer saying it was seeing some promising early signs of recovery in its key markets. Its shares rallied as high as $6.39 on the comments but finished the week up 3 percent at $5.78.

Steel & Tube reported a 253 percent lift in its interim result following a series of profit upgrades as the company benefited from a buoyant construction sector. Its shares finished the week up 4c at $1.58.

Auckland International Airport slumped to a net loss of $11.5 million because of the ongoing border closure, while Air New Zealand reported a 623 percent increase in its loss on the same period last year and confirmed it expects to announce details of its previously delayed capital raising by the end of the month. Tourism Holdings also saw its loss for the six months to December widen to $2.3 million. Its shares ended the week down 6 percent at $2.47.

The week ahead

Monday

• Restaurant Brands Full Year Result
• T&G Global Full year Result
• Harmoney Corp Half Year Result
• Genesis Energy Half Year Result
• Employment Indicators (Jan) – Stats NZ
• Bank Assets & Liabilities – RBNZ

Tuesday

• Vista Group Full Year Result

Wednesday

• Booster Innovation Fund NZX listing
• Building Consents (Jan) – Stats NZ
• International Trade (Dec Qtr.) – Stats NZ

Thursday

• Bank Financial Strength Dashboard (Dec) – RBNZ

Friday

• Banks Core Funding Ratio – RBNZ