Hope, Confidence and Conviction

J.Stern_.Commentary1-o5q49wtt6foflaqjix8tvnyv7isuh3jsrgf3rp2we8

“Buffet buying now in the face of all the uncertainty – the geopolitical and economy and interest rate uncertainty – is a real vote of confidence in the US and global economy.  He is telling us that he believes there is value and that you can buy companies that will do well and will deliver more value than cash”

Our Chief Investment Officer, Christopher Rossbach, had an opportunity  to comment on Warren Buffett’s recent purchases for Berkshire Hathaway in this weekend’s Financial Times.  We do not always buy the same companies but we agree with him that there is great value to be had from mispriced stocks. 

The Russia/Ukraine conflict continues at a terrible human cost.  We believe it is significant that Russian gas is still flowing through Ukraine to Europe and being paid for, that Russian oil is being sold, most likely to China, India and other places and being paid for, and that the US government has allowed Russia to route USD interest payments on bonds through JP Morgan and Citibank to avoid default. This is all despite the conflict and the sanctions, and in particular the ban from SWIFT.  It makes us hopeful that basic political and economic relations still exist and that there is a possibility that the conflict can be settled. 

We started the year with the prospects of a strong global economic outlook, a short-term recovery from the Covid pandemic and the beginning of a multi-year economic cycle, led by investment in public and private capital infrastructure.

The pandemic set back this recovery by two years and now the Russia/Ukraine conflict has thrown it into disarray.  The main impact is on commodities like oil and gas, fertiliser, grain, and some metals.  We believe that the most impactful sanctions could be reversed quickly if there were a settlement. On the other hand, the suspension of trading in Russia by US and European companies like Nestlé, which we commented on last week, could last longer, and sanctions on oligarchs and politicians could be in place even longer still.

High headline inflation is being driven by energy prices and other short-term price increases related to supply constraints in inputs, labour, goods and services. Many of these are due to the pandemic and the Russia/Ukraine conflict, and should go back to more normal levels over time.    China locking down Shanghai and Shenzhen is not helpful but is part of the reality that Covid is still an issue that will affect global supply chains.  Millions of Ukrainians fleeing their country and looking to work will require significant government spending and provide much-needed labour supply in the EU and elsewhere.  These are just two examples of the issues and the complex impacts they will have. 

That is why we believe that inflation will moderate over the medium term and why we are not worried about rising inflation and higher interest rates over the long-term.   We do not see how 30-year record levels of inflation could possibly become embedded within the global economy.  The idea that central banks could lose control of inflation seems to us completely misplaced and it would be an error of judgement to make investment decisions for the next five or ten years based on the expectations that today’s inflation will continue.

Read the full article here 

Share this article

Close Menu