26 Feb Capital 19 Catch-Up
“War, what is it good for?” – Edwin Star 1970
When Edwin Star released the famous song War(What is it good for?) I doubt he was thinking stock markets. But that seems to be the answer to his question.
The Russian invasion of Ukraine has caused a big change in sentiment. War does that. It is a sad truth that wars are good for financial markets. The US S&P500 gained 3.7% from the point the tanks started rolling to finish 0.8% higher for the week.
The Australian market didn’t fare as well, with All Ordinaries down 3.0%.
It’s not easy being an investor and trying to time the market. It’s even harder being a commentator as your words are chiseled into the web for anyone to drag back up at a later date.
But that’s what we get paid for, so here it is.
Last week will turn out to be a significant bottom in the markets. It is time to get your cash out and buy stocks that have been significantly sold down.
Markets don’t like uncertainty and often bottom at times of maximum uncertainty.
Last week the market was dealing with two areas of uncertainty. First is what the path of interest rates will look like. The second is how the west will respond to the Russian invasion of Ukraine.
Those two factors led to traders dumping everything. Even energy stocks got sold a bit and then recovered on Friday
(talking of energy, it feels like a good time to take profits from this sector and deploy those profits into beaten-down tech. Whilst I am still long term bullish on oil, in the short term it has probably hit a peak and will fall $10 to $15 as the Ukraine premium unwinds)
When the tanks started rolling on Wednesday stocks fell significantly. The West responded with weak sanctions. Once that news was out, the second uncertainty was removed, and traders got back to buying stocks again.
I saw the same thing happen in 2003. Stocks had been falling for 2 years as the Tech Bubble unwound. On March 20, 2003, I was sitting at my desk and suddenly everything took off. I’ve never seen such buying come out of nowhere and I had no idea why.
About 30 minutes later they interrupted the news program to cut to Iraq and scenes of a convoy of American tanks rolling across the border, and it dawned on me that the markets knew this news a good 30 minutes before it was reported anywhere else. The S&P500 went on to add nearly 100% from that date before the GFC stopped it in late 2007.
The same thing happened this week. Tanks rolled and stocks rallied.
The interesting thing now is – how do the sanctions impact Central banks’ intentions to raise interest rates?
Judging by the reaction of tech stocks this week, these sanctions could slow the path of interest rates. (Google (GOOG) added 6.5% after the sanctions were announced)
The next US Fed rate announcement will be Wednesday, March 16, so we have two and half weeks to go before this uncertainty is also removed. Expect a bit more volatility as we lead up to this date.
I would encourage you to buy the dips over the next two weeks. There are plenty of good cheap stocks out there. Talk to your Capital 19 advisor if you want suggestions.
A 25bp move is locked in. Fed Futures are pricing a 33% chance of a 50bps move.
I think they will go for 25bps to start the cycle. That will reassure markets and send stocks higher. The Fed will also send a message about the next likely move. They have stuffed up their messaging recently, with an about-turn from no rises until 2024 to rises in March 2022 happening in December.
It was this sudden change in Fed speak that sparked the sell-off in tech names. Markets thought they knew with certainty (there’s that word again) what the future looked like and the Fed suddenly made it uncertain.
The Fed won’t make the same mistake again. They have been wonderful in slowly disseminating their intentions for the last two decades and it has created a lot of wealth for stock investors. They will return to calming markets with their words again.
This means the uncertainties will be removed and stocks will resume their march higher. If you want to capitalise on this, you have two weeks to get your money into the market before the recovery begins in earnest.
If you think of areas where people might be uncertain of the future, then it is fairly easy to look at Russian stocks. Maximum uncertainty means maximum value.
This idea is certainly not for the faint-hearted, but we can’t ignore the value represented in Russian companies right now.
The risk is sanctions do something horrible to any Russian investment. It might mean you don’t get a dividend paid because Russian banks cannot send Roubles out of the country, or it might mean investors are not allowed to hold investments in Russian companies and positions are liquidated in a fire sale.
But if the sanctions are not too restrictive then the value here is quite extraordinary.
Yandex is the “Russian Google”. It reported 54% sales growth for 2021 and forecasts 40% sales growth for this year.
In November last year, this was an $86 stock. It is now just $20.
It is quite unbelievable that right now it is trading at just 1.7X Sales. Google (GOOG) trades at 7X Sales so you can see how cheap Yandex is.
I know. You think I have lost it with this one. Sberbank is one the US have issued sanctions against.
In October last year, this stock traded at $20. It is now about $4.40. It has been paying out between $0.95 and $1.00 dividend for the last 3 years. If it can do this again that represents a yield of 23%
The Sberbank stock price jumped 23% on Friday, which means someone out there has decided things won’t be as bad for this bank as traders fear they could be.
The Second largest Oil and Gas producer in Russia. Germany and the rest of Europe will still need to buy their energy from Lukoil.
The stock price is now half of what it was just a couple of weeks ago at around $50 which means the dividend yield is now 18%
Please remember there is a lot of regulatory uncertainty around these ideas, but as long as the sanctions are not too heavy-handed you can be certain you are buying something very cheap here.
Things might be different this time, but back in September 2014 the west imposed sanctions on Russia’s largest bank, Sberbank (SBRCY) after Russian aggression towards Crimea. Three years later and Sberbank had gone up 5x.
Good investing is doing things others do not want to do. The best investments always make you feel uncomfortable at first.
It is possible these companies do not pay a dividend because they do not have the ability to transfer funds to foreign owners. But I doubt that will last forever. The war in Ukraine will eventually subside, the world’s attention will move on and there will be more clarity on Russian companies.
You will probably see lower prices on these stocks this week as the world exits positions. But please bear the short-term risks in mind on these ideas.
Employees of Capital 19 presently own LUKOY stock and intend to buy YNDX and SBRCY this week.
Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account.