The main theme of this investor overview will be the economic impact of the Russian-Ukrainian conflict. Mainly so that you can prepare for it, either as an individual or as an investor.
This article is for information purposes only and is not intended to provide investment advice. It is not a solicitation to buy or sell any particular financial instrument. If you would like help with this, please contact us to speak to a licensed member of our team.
While I share the hope of many of you that the war conflict will come to an end as soon as possible, its economic effects will remain with us for a while after peace is achieved.
What are the possible economic effects of the war?
Russia’s main presence in the world economy is in the raw materials sector, which is where the impact of austerity will be felt most.
Prices of raw materials (e.g. metals)
20% of the steel used in the EU is imported. Roughly 40% of this 20% (i.e. almost 8% of the total) came from Russia.
Although this volume is not significant overall and there are other steel suppliers, it is still a challenge.
Normally, agricultural work is well under way in the fields in March-April. Although it is possible that farmers in areas even a little further away from the war zones have started work and there is a chance of harvesting. But the amount of production that would normally be produced and exported to the EU is unlikely to materialise.
Let us not forget that Ukraine is the fourth largest food supplier to the European Union. Although Hungary is not directly affected, it is more affected indirectly. If you think about the fact that the price of food in the EU will be higher because of the war, this will be reflected in the wage demands of the workers at some point, and will also be reflected in the price of the products there. So we can only import these products at higher prices.
Food production prices
You could say that if Ukraine cannot export, then never mind, we will grow it ourselves, we just need a little more fertiliser.
The problem is that natural gas is essential for fertilizer production, and the price of natural gas was already high before the war.
You may have guessed that neither Ukrainian imports nor home production will be a real solution this year. And the market has priced this in. If you look closely at the price of wheat, you will see that it jumped a lot just as the war broke out.
And now that we have fertiliser and natural gas, we have oil:
High oil prices
It’s no secret to you that the price of oil has skyrocketed since the outbreak of war.
There are several reasons for this, the most important of which are:
- many countries have decided to try to become completely independent of Russian oil and gas imports
- the resulting loss of production has to be made up from other sources, but it takes time to spin up the production until a new equilibrium is reached, until then you will see higher prices due to relative shortages
- a relevan part of Russian banks are disconnected from the SWIFT system, so settling the purchase price is not easy, although not impossible
- some investors are also afraid that the Friendship pipeline, which allows the cheapest and most efficient delivery of oil from Russia, will be damaged by the war, so you can see some of this future fear
What can we expect if oil prices stay high?
If the price remains high in the short term
Consumption is expected to fall both on the private side and on the business side. If demand falls, this will also reduce prices over time.
Obviously, neither transport nor industrial consumption will stop completely, but it is expected that there will be companies that will not be able to operate economically under these conditions.
If a significant part of the industrial players that are also involved in production stops, this will lead to a shortage of goods, which will lead to inflationary pressures.
If prices remain high in the long term
In the case, that the situation is not settled, the high price of energy will be reflected in the price of goods and services. And above a certain level, the economy cannot absorb this. In the graph below, the price of oil per barrel is shown in blue and the grey bars indicate a recession for whatever reason. If you look at the chart below, you will see that in many cases, significant oil price increases have been followed by recessions in the following year.
Can we now expect a recession because of oil?
The short answer is: no one knows.
What counts as high is quite relative. If you look only at the short term, over a period of a few years, it is a fact and a reality that the price is now considered very high on the one hand, and on the other hand it is a fact and a reality that it has risen suddenly.
If you look a little bit further out and look at the prices, you can see that the price of oil was the same in 2014.
But many years have passed since then. If you also take into account the weakening of the dollar, the 2014 exchange rate at today’s prices is around $200-220, yet there was no recession then and there because of it. But the situation was worse than it is now.
What can we expect for fuel here at home?
At the moment in Hungary there is an official price for petrol for private consumers, but there is no clear decision yet on whether this will be phased out. Neither a specific date, nor whether it will be phased in gradually or in one step.
Until then, the price difference will be borne by MOL, among others. It can compensate for this by buying Russian Ural-type oil. You can criticise them for actually financing the war, but they have no other sensible option. They could either stop production, which would empty the petrol stations and make the investors unhappy, or they could buy more expensive oil, but they would have to convert the refineries to process this different quality, and in the long run the losses would mean that they would stop production, empty the petrol stations and make the investors unhappy.
Talking of investors, let’s talk about investment.
What can be expected from investments?
In previous investor overviews, we’ve already said that 2022 is going to be a bumpy year, and there was no mention of a war to top it all off.
What we’re seeing is that the kind of confidence in investing that we had in the post-Covid boom has completely disappeared. Markets are highly volatile, so many people don’t know which way to go.
If you are in a similar situation, contact us to see how you can emerge from the current situation as a winner.
In the meantime, until we meet, let’s get back to shares.
The economic impact of the Russia-Ukraine war has had its winners, a trend that is likely to continue, at least until peace and economic settlement. These winners have typically been from the industries already mentioned.
One of the biggest winners was Norway. In the picture you can just see the dynamically rising share price of the Norwegian oil company.
It can be seen that, although it was showing results before, it has “changed” since the beginning of the year. As Norway has significant oil fields, the weight of production is expected to increase.
Given the very strong demand in Europe for a move away from Russian oil, similar trends can be observed in other oil companies serving Europe.
Also related to oil products, being based on gas.
The company is just a sample, but many other companies in this field have seen a similar dynamic rise. Given that in agriculture fertilisers are not only used in the spring but also throughout the year, demand for their products is expected to remain throughout the year.
In the industrial metals sector, it is not only the steel companies mentioned above that are likely to do well. High electricity prices (typically also generated in hydrocarbon-fired power plants) have also brought a good part of aluminium production to a standstill. However, the remaining companies are able to sell their products at higher prices, which is reflected in their results.
New-build properties make up a relatively small part of the overall market, so fortunately the high price of building materials will only have a partial impact on the final result. What will have a bigger impact is the rise in the base rate. This is not only being seen here at home, but everywhere else.
The impact starts from the fact that people in the banks are thus faced with higher lending rates, more expensive or no access to finance at all. For this reason, either for economic reasons or out of necessity, they are considering whether now is the right time to buy a new home. The end result can go one of two ways:
- house prices fall
- property prices remain stable, but fewer transactions are expected
Both solutions will lead to a new equilibrium.