Russia’s invasion of Ukraine this week rocked financial markets and it is interesting to note that while Treasury yields plunged across the entire curve, they recovered swiftly with the yields on the two-year and 10-year US Treasury notes actually higher today than they were before the conflict started. This would seem to indicate that since the United States and Western allies are unlikely to deploy troops into the Ukraine, resorting instead to applying sanctions on state-owned financial institutions, high net-worth Russian individuals as well as Russian sovereign debt, the Federal Reserve’s and other central banker’s policy tightening plans are unlikely to be changed by these geopolitical developments.  While Russian equity prices have collapsed by over 50%, the economic fallout on the global economy is likely to be minimal.  The nominal GDP of the Ukraine was approximately $154 billion and while the Russian economy is significantly larger at $1.7 trillion, it accounts for less than 2% of global GDP.  U.S. exports to Ukraine and Russia total only $2 billion and $6 billion respectively and EU exports to the two countries is less than 1% of the total EU’s GDP. The picture is very different in terms of its inflationary impact since Russian production of crude oil amounts to 10 million barrels per day or roughly 10% of global oil production and it is the major supplier of natural gas to many countries in Western Europe. 

For the most part, CPI inflation across the major developed economies remains elevated due to COVID as evidenced in recent data.  Here in the UK, the January CPI report surprised to the upside with the Headline CPI edging up to 5.5% year-over-year and with core CPI at 4.4%.  Given this and the now elevated inflationary expectations, we anticipate further, but gradual Bank of England tightening with its concomitant impact on asset prices which is to put pressure on the high PE valuations of the market and growth stocks in particular.  This is evidenced in the MSCI declining by 2.7% during the month, largely driven by similar declines in the broader US market where the S&P500 index reported an overall decline of 3.1% and the tech heavy NASDAQ declined by 3.4%. The UK markets responded similarly with the broad indicator, the FTSE 250 Index closing down by 3.9% over the month as compared to the FTSE 100 which was down by 0.1%.  As mentioned previously, the FTSE 100 is home to many larger, older and more traditional companies including BP, Royal Dutch Shell and various utility companies.  The Fledgling Index was down by 3.8% during the month with the Small Cap Index declining by 3.9%.  Of the various indices, the AIM All Share Index showed the biggest decline of 5.0%. 

During the month we sold our holding in Forterra and increased our exposure to Paypoint and Fevertree following recent announcements by these companies.  Our portfolio declined by 4.0% during the month, in line with the overall market.  This resulted in a 4.2% decline in the NAV after providing for the expenses which remain under strict control.  Cash currently comprises 3.9% of the portfolio at month end.