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March 10, 2022

What does war in Ukraine mean for your investments?

We have pulled together a list of common questions from our community and provided answers so that you can stay informed.

The impact of Russian hostilities.

Clearly the invasion of Ukraine by Russia is above all a human tragedy, and as a diplomatic resolution feels less and less likely, we remain hopeful that the preservation of human life will rise to the top and peace will prevail. We, like all of us, are shocked. We express solidarity with Ukraine and its people.

As you will all have been reading in the media, the conflict does have implications for trade, energy, and food supplies. Many within our community have got in touch to ask about the impact on their investments with The Big Exchange which has prompted us to put together some Q&As on how your investments might be affected by these worrying events.

How is the rest of the world responding to Russian hostilities?

Following the devastating attacks on Ukraine, the US and its allies announced a series of sanctions on Russia. These include preventing certain Russian banks from processing financial transactions, denying access to foreign currency deposits, stopping Russian companies raising new capital, freezing assets, and blocking technology exports to Russia. At the time of writing the US and the UK have extended their actions to a ban on imports of Russian oil and gas imports. The EU has not gone as far but has instead laid out plans to reduce Russian gas imports by two thirds within a year.

 Meanwhile, some big consumers are boycotting Russian oil, and several oil and gas multinationals, including BP and Shell, have announced they are pulling out of interests in Russia. BP said it would write off up to $25bn to exit its stake in state-owned Rosneft. (1)  Many multinational companies, such as Starbucks and Coca Cola, have closed their outlets in Russia.

It is impossible to say what will happen next, however, it seems likely that sanctions will have an immediate effect on companies that trade with Russia and more broadly lead to commodity shortages. This has implications for cost inflation, interest rates, and supply chain disruption with a knock-on effect on global economic growth.

Are we facing a global energy crisis and are renewables the solution?

Russia is a leading supplier of oil and natural gas and oil prices have soared after slumping during the pandemic. Brent crude (a popular benchmark) recently breached $125 a barrel and if fighting intensifies could spike even further. Gas has seen a long period of under investment so if Russia restricts supply, there is limited scope to source it elsewhere.  

The disruption will hit the EU region hardest, as around 25% of its oil and 40% of natural gas imports come from Russia. (2) Germany’s decision to terminate the Nord Stream-2 gas pipeline project increases the pressure to find alternative energy sources. The US has more domestic supply whilst the UK sources little from Russia, but both will feel the effects of higher prices.  

Growing concern about energy security suggests the adoption of renewables should accelerate. European governments are keen to back domestically generated renewables and there is speculation that current EU targets for 32% of energy could come from renewables by 2030 could be increased to as much as 40%. (3)

With renewables now cheaper than fossil fuels in most regions, the economics stack up in favour of the shift although it will take time to bring on the necessary capacity, particularly for countries that use a lot of gas. (4)

Will central banks increase interest rates more rapidly to tackle inflation?

Given Russia’s prominence in commodity markets, we have already seen a steep rise in prices of energy, metals, and agricultural goods. The country has extensive platinum, nickel, and gold resources whilst Ukraine is a major producer of wheat, corn, and cooking oil. This suggests that inflation worldwide is set to remain higher for longer. 

Putting interest rates up too quickly risks tipping the global economy into recession yet keeping them low for too long could result in inflation spiralling out of control. On balance, we think Central Banks will want to prioritise growth, so are likely to continue raising rates but at a slower pace than previously expected. 

Is a recession around the corner?

Higher prices affect many areas of the economy and deepen the cost-of-living crisis which could hurt economic growth. However, most analysts think the oil price would probably have to be closer to $150 to trigger a global recession. 

On the positive side, many consumers in developed markets have lockdown savings which should support spending. In addition, although inflation is high, low unemployment is driving wage rises, with lower earners (who tend to spend more of their income) often receiving the biggest boost. 

Obviously, events in Ukraine are distressing so consumer confidence could dip, and people may decide to put non-essential purchases and travel plans on hold. We expect downgrades to this year’s GDP forecasts (which factor in a strong rebound from the Omicron setback). Schroders, for example, have already reduced their 2022 estimate from 4.0% to 3.7%. (5) 

What does all this mean for The Big Exchange customers and their assets?

We acknowledge that funds which avoid exposure to sectors such as oil and gas and mining may have underperformed their benchmarks this year. That said, some renewables businesses (including wind and solar operators which may feature in your funds) have returned to favour after a disappointing 2021.  

In a higher inflation environment, companies which provide essential goods and services and can pass on cost increases should be best placed to cope with challenging conditions, for example healthcare and food producers. 

We believe the journey towards building a more sustainable, low carbon future remains true.  This should provide long term investment opportunities in transport, infrastructure, building materials and enabling technologies, to name a few.

How has The Big Exchange had to react to sanctions?

Big Exchange continuously follows all the sanctions protocol put in place by the UK Government, HMRC and the FCA. We have not and will not allow any sanctioned individual to invest on The Big Exchange. 

We reached out to all our fund manager partners and our Investment Committee to understand what was being done about exposure to Russian assets in general and in any fund listed on The Big Exchange.

How many funds on The Big Exchange are exposed to Russian/Belarusian companies?

The Big Exchange believe in transparency, and we always strive to give you as much information as possible. We can safely say that not one of the funds within our Bundles had any exposure to Russian companies. Furthermore, no fund was invested in Russian Government Securities (or state-controlled entities). However, the 5 Emerging Market funds on The Big Exchange provided us with fully transparent information on their exposures to Russia and/or Belarus:

  • JPM Emerging Markets Sustainable Equity Fund - as at 3rd March 2022, the aggregate exposure to Russian stocks was 0.05%. There is no direct exposure to Ukrainian stocks, however there is a holding in EPAM Systems. EPAM was founded in Belarus in 1993 but is now US listed and US domiciled. It provides software services globally and is suspending business in Russia. An estimated 29% of its employees are based in Ukraine and they have pledged €100m over time to assist their Ukrainian workforce affected by the conflict. (6)
  • Alquity Future World Fund - at the end of February, it held 0.86% of the portfolio in Russia based holdings (Fix Price, a discount retailer and Headhunter Group, a software company).  These holdings have been written down to 0% in the fund. The only other stock connected to Russia was Hungary-based OTP, which was sold a few weeks ago. The Future World fund does not have any further exposure to Russia or companies with strong links to Russia. (7)
  • Pictet Emerging Markets Sustainable Equities – The fund had exposure to Russian companies at the beginning of 2022 but has confirmed to The Big Exchange that is has since exited all positions in Russia and will not be investing in Russia going forward. (8)
  • Stewart Investors Global Emerging Markets Sustainability Fund - holds no Russian listed companies. As above, for full transparency Stewart shared with us that the fund holds EPAM Systems, which is a US-listed and US-domiciled IT services company, founded by a Belarusian entrepreneur who moved to America and established the company, which serves mainly US clients using software engineering talent based in Eastern Europe including Ukraine and Russia. (9)
  • UBAM Positive Impact Emerging Equity - The fund had no direct investments in Russian companies. However, the team pointed out to us for full transparency that it holds two companies that indirectly had exposure to Russia through their revenues. Mondi generates 12% of its revenues from Russia and Richter Gedeon, a Hungarian company generates 15% of its revenues from Russia and 2.6% from Ukraine. These positions were reduced on the first day of the invasion for risk reduction. (10)

Can I see which companies are in my fund?

YES! People in our community have been in touch with us with regards to boycotting companies that are still doing or have done business in Russia. We allow all customers to search through ALL the holdings within a fund for the companies that they do not want to invest in. This is ultimate transparency. You can do this through selecting “See Details” on our fund list, or through accessing “Fund Insights” in the menu bar on your Dashboard. Please bear in mind that some of the information is under a time-lag and may have changed from what you currently see. If you have any questions, please get in touch with us.

What should I do?

Markets are likely to remain volatile (experiencing daily swings up and down) until we have a clearer view of how events in Ukraine might develop. But volatility is part and parcel of investing and over history markets have recovered from wars, depressions, bursting of price bubbles, financial crises, and pandemics. 

Whilst we can’t predict the future, panic selling of your investments may not be the best course of action. Seeing your portfolio lose value is worrying but if you lock in those losses, you may not be able to get back into the market before prices recover. It’s worth remembering the old saying that ‘time in the market is more important than trying to time the market’.  

If I have more questions?

Please get in touch with us at enquiries@bigexchange.com or through our contact form. Please remember that when investing making money is not guaranteed and your capital is at risk. The value of your fund can go down as well as up.

Sources

1 https://www.theguardian.com/business/2022/feb/27/bp-exiting-its-1975-shareholding-in-russian-oil-giant-rosneft

2 https://ec.europa.eu/eurostat/cache/infographs/energy/bloc-2c.html

3  https://windeurope.org/newsroom/press-releases/its-official-the-eu-commission-wants-30-gw-of-new-wind-a-year-up-to-2030/#:~:text=The%20Commission%20proposal%20raises%20the,up%20from%20180%20GW%20today

4 https://www.irena.org/newsroom/pressreleases/2021/Jun/Majority-of-New-Renewables-Undercut-Cheapest-Fossil-Fuel-on-Cost

5 https://www.schroders.com/en/uk/adviser/insights/economic-and-strategy-viewpoint1/economic-and-strategy-viewpoint---march-2022/

6 7 8 9 10 Direct responses from Fund Managers to The Big Exchange as at 8th March.

 

Please remember that when investing, making money is not guaranteed and your capital is at risk. The value of your fund can go down as well as up. Tax treatment depends on an individual’s circumstances and may be subject to change. 

The Big Exchange (TBF) Limited is a wholly owned subsidiary of The Big Exchange Limited. The Big Exchange (TBF) Limited is an Appointed Representative of Resolution Compliance Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 574048). (6809)

 

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