Martin Currie’s Alastair Reynolds, Portfolio Manager, comments on supply chain disruption, higher volatility and the global implications of Russia’s war in Ukraine.
“Aside from its tragic human cost, Russia’s invasion of Ukraine has a global economic consequence not only through sanctions but also through commodity prices and supply chains which will need to be addressed in several areas, such as the automotive industry, green energy solutions and electrification. High levels of volatility have been experienced in global markets following the conflict and we highlight here a few of the issues driving this.
“Russia’s supply of oil and natural gas in Europe is well-known and we have already seen the impact of the conflict on oil prices in particular, which have soared on concerns of short supply. This could prove a challenge for those economies which remain heavily fossil fuel-dependent, such as India. India has one of the largest economies in the world and is leading the way in positive emerging markets earnings revisions. The country is experiencing structural change and consumer trends which, when combined with a positive home macro environment, are helping to nurture domestic companies. It is home to vibrant, entrepreneurial companies which are market leaders in their respective segments, offering exciting investment opportunities. Almost three-quarters of India’s energy use is from fossil fuels, of which 38% is imported. Broader market sentiment has already impacted this market which is down 5.4% year-to-date . It is important to note, however, that the disruption to the fossil fuel market is impacting global buyers and not restricted to emerging markets only.
“As well as fossil fuels, there are other products where shortages could cause significant disruption because of the share of global supply sourced from the region. Russia, Ukraine and Belarus play a key role in fertilisers (around 40% of global production), platinum group metals (particularly palladium at close to 40% of global production), grain-based agriculture, neon gas (half of global supply, most of which is used in semiconductor manufacturing), as well as being a large exporter of aluminium, nickel and copper sulphates (used to produce copper). Nickel, for example, is used widely in batteries and even in conjunction with copper for the tubing used in desalination plants. Copper is a key raw material in the theme of electrification. The electric vehicle (EV) supply chain and components may be impacted by shortages in these raw materials. We own companies within the EV ecosystem as we believe this is a long-term structural growth opportunity.
“A further consequence of the conflict is the impact that extreme price rises are having in the commodity market. Commodity traders face extreme liquidity challenges as the capital required to back derivatives trades and purchase contracts has risen significantly. Down the value chain the impact can be severe, with examples already evident in the UK utilities sector where customers are seeing huge price increases and the energy supply companies themselves face bankruptcy. Clearly, the economic implications of Russia’s invasion of Ukraine are global and wide-ranging. Supply disruption is a key issue and is likely to have an impact on a global scale. This will manifest in emerging markets too, such as in the cases we’ve highlighted above for India, EVs and semiconductors, but fundamentally we can expect this to be a global problem.”