That we happen to export things in common with Russia means Russia’s inability to export turns in our favour … so there’s actually a moderate silver lining to this very, very dark global cloud’: Adrian Saville of Genera Capital.
By Fifi Peters 28 Feb 2022 21:24
NZINGA QUNTA: My name is Nzinga Qunta, standing in for Fifi Peters. Tonight we are going to be talking more about the Russia-Ukraine issue. The Guardian is reporting that talks between Russia and Ukraine have begun, although for now tensions continue to affect markets. As I’ve said, although it’s geographically far away from us, that war could affect South Africans with already beleaguered pockets and investments. We’ll will be making sure that here on the SAfm Market Update with Moneyweb we get you answers to some of the issues that people have been raising.
The most obvious one that we spoke about with Makwe Masilela from Makwe Fund Managers a little earlier on was how the oil price is affecting us here together with our weaker currency, and affecting us in a war that we are not part of. But it is affecting our pockets.
Adrian Saville, who’s an investment strategist at Genera Capital joins me now. A very good evening to you. Thanks so much for your time. One would say, from even that petrol price increase, the war is affecting South Africans already and it may get worse.
ADRIAN SAVILLE: Yes, indeed. One of the most obvious pass-through mechanisms is the oil price that will fall through in the form of what we call imported inflation. What we haven’t seen is our currency move in terms of rand weakness or rand vulnerability; the rand has been, relatively speaking, quite stable.
There are two very obvious threats and the one is in the form of oil prices and the other in the form of a weak currency, where we could get contagion through emerging markets’ shared weakness. The rouble has shown just how volatile this could be and, if the rand were to move in sympathy with that we would have a double whammy to petrol prices, with that feeding through to inflation.
NZINGA QUNTA: Adrian, I’m glad you brought up that issue of currency and saying perhaps we don’t need to worry now because we are seeing oil, gas and other commodities jump, and the rouble crashing on the back of the 20% interest rate by the Russian central bank. So we know that their currency is tumbling and you’re saying we might move in sympathy. Any other factors that could affect our currency that we need to maybe look out for in the future?
ADRIAN SAVILLE: Well, I think there are at least two things going on that are helping the rand. The one is that the contagion, as we would refer to it, isn’t present, so you haven’t seen moves spilling over into other emerging-market currencies. It’s been contained or confined.
The second is there is a supporting factor to the rand. That is the generally buoyant commodity prices. If you look at the moves in precious metals, gold and platinum, that’s going to help the South African rand, given that that’s an important part of our export basket. That we happen to export things in common with Russia means that Russia’s inability to export turns in our favour. So, as bizarre or perverse the scenes, there’s actually a moderate silver lining to this very, very dark global cloud.
NZINGA QUNTA: When it comes to companies in South Africa that have exposure in Russia, some of them are perhaps not doing so well. I saw a report on News24 about an hour ago that Mondi, which owns Russia’s largest paper producer, is plummeting. Are we going to see similar things perhaps with Barloworld and other companies that have exposure?
ADRIAN SAVILLE: Without question for companies that have a footprint or a supply chain with Russian presence, Russian exposure will have negative implications. The headline grabber today has been BP, British petroleum, with its very large Russian investment; for intents and purposes you can put a line through that. You can write it down to zero in the case of that investment – or to get it back to some type of reasonable fair value is going to take a dramatic reversal of fortune. So this has a range of negative spill-overs.
Then there are effects which will start to knock on because of supply-chain challenges, because of trade corridors that start to slow down, because of the elevation of oil prices – and particular economies will feel this far worse than others. One of the primary transmission mechanisms to the United States is energy prices. We started the year worried about inflation in advanced markets. I think that that concern, if anything, goes higher from here.
NZINGA QUNTA: Right. These talks between Russia and Ukraine being reported – allegedly both foreign ministries have confirmed that this is happening – how much credence is the market giving to that, or how much hope is there that perhaps this could be resolved much sooner than many people expect?
ADRIAN SAVILLE: I’m not a political analyst and I think it would be bold or grand of me to suggest I’ve got any particular insight here.
NZINGA QUNTA: Let’s just talk about the money, then.
ADRIAN SAVILLE: I desperately wish that comes to an end and that we can find sanity. It’s a very, very stressed environment.
NZINGA QUNTA: Okay. Market commentaries from some firms in South Africa are saying that, despite the jitters, people must just hold on to their portfolios because wars blow over. Is that the kind of solid advice that you should be following, is that something that makes sense in terms of not panicking about what the many different scenarios could be?
ADRIAN SAVILLE: Well, having just suggested that I’m not a political analyst, let me now go to political and economic history which I think does give us a guide. I wrote an article – which people can find on my social media if there’s any interest – talking to exactly this, that I have a real concern based on the events of the last couple of weeks, that we step into a new era, a new world order, that when the Berlin Wall fell and the iron curtain came down, we moved into a period of 30 years of coordination, broad-based collaboration and general improvement and prosperity. I think we’ve good reason to be suspicious, concerned, anxious that all of this is in the process of being reversed, because in the absence of finding an amicable resolution, this is a polariser; you need to choose sides.
Those sides will be politically oriented, forming power blocks and you can think of a formation of a fresh iron curtain based on where the world finds itself today. If anything, that iron curtain is potentially even more threatening than ‘Iron Curtain 1’.
NZINGA QUNTA: The impact of sanctions and measures such as blocking Swift in Russia, such as the interest rate hikes, is going to hit people in Russia very hard. We know that different governments are also trying to target the very wealthy people in Russia. If we’re talking broadly about a war and its effect on citizens, what kind of economic challenges will people who find themselves in those two countries be expected to face in the future if this is not resolved?
ADRIAN SAVILLE: Well, the damage to society, to social fabric, to communities, is potentially devastating and long, long lasting. Analysts might be saying hang on to your portfolio, this too shall blow over. That isn’t the case if you are on the receiving end of rockets fired into residential areas. So there is a deep, deep social impact here.
Sanctions are designed, intended to bring – no pun intended – a very swift end to this. I think one of the concerns with sanctions, and this points to the political allegiances that I referred to earlier, is if you look at Russia’s trade pattern, it has overwhelmingly shifted away from trading in US dollars to trading not only with China but in Chinese yuan. So sanctions are going to have a much harder time of having the intended impact if that is the shift in the trade pattern, and if that is the move in the way in which trade happens – that you are no longer trading on US dollar platforms.
So there ways in which countries might have an extent of immunity that isn’t beyond the assumption of the sanction. Then we know that there is an entire industry called sanction-busting that people find ways around. That doesn’t change the fact that these sanctions will hurt, and you are starting to see some effects of the sanctions.
There are positive sanctions and negative sanctions. When I say positive, I want to use ‘air comments’ here. I don’t mean that these are good or that I necessarily support them. Let me stay away from the political commentary, but a positive sanction is a reinforcing sanction. So, for instance, ‘we will supply technology and arms and equipment to the Ukraine, and we will not supply the same to Russia’. There’s a double whammy. It’s not just the denial of access to one, but also the promotion of access to the other.
NZINGA QUNTA: Adrian Saville, thank you so much for your time. Adrian an investment strategist at Genera Capital, joining me to talk about the economic effects of that Russia-Ukraine war.