WAR GAMES

The Russian incursion into Ukraine has swiftly stolen the headlines from the inflation story, as President Vladimir Putin’s bluff has turned into a tantrum against Ukraine and Democracy. Shocked global markets were not expecting a war scenario, as algorithms and model portfolios appear to be confused, with some investors turning to the Pentagon’s War Game outcomes. At Samra Wealth Management, we double-down on our February 2022 consensus, the year-to-date volatility is a reminder to investors of the fragility of the financial markets. With Putin playing his hand, it is now over to Fed Chair Jerome Powell, as the stability of the global financial markets has become a geopolitical game of poker. What was expected to be a swift take-over of Ukraine has resulted in heavy early losses, questioning Russia’s military capabilities. With Russia dedicating 4.3% of GDP to military spending, an untested military favoring rockets over precision guided missiles prompts a greater concern. Vladimir Putin wrote the doctrine on “escalate to deescalate”, creating concerns of a low-yield nuclear attack. Russian foreign policy may have caused irreparable damage to the Russian economy and financial markets, as Russia cancelled trading of stocks in Moscow, on Monday. Global sanctions against Russia caused the (Ruble denominated) Russian stock market (MOEX) to decline -45.66%, causing greater concerns for foreign investors as the Ruble fell -28.36% against the US Dollar YTD. With Russia’s credit called into question, the Bank of Russia has hiked its key interest rate to 20% from 9.5%. With Russian stocks on the London Stock Exchange plummeting, a prolonged closure of Russian markets, may present a déjà vu scenario, creating an environment of illiquidity and hyperinflation where currency becomes worthless, and Russians re-live trading vodka for bread through the remainder of winter. As global banks, governments and corporations shun Russia, Robinhood strategies from hacking organizations such as Anonymous are disrupting Russian infrastructure. With the S&P 500 falling into correction territory and the NASDAQ in a Bear Market, investors should invest with a great deal of caution, as what has worked in the past may not work this time. As global investors seek safe havens, we would typically see a rotation towards tech behemoths. With the Fed expected to raise rates in March the tech sector has priced in lower future valuations and as the bond yield rises, bond prices find themselves on a downward trend, as investors rotate out of “risky” assets, into cash and fixed income. The Fed now has a balancing act, finding an equilibrium between raising rates and sending the US economy into a recession. During a typical recession, the Fed would lower the key interest rate to help stimulate the economy, however, with rates still near all-time highs, this is not an option. At Samra Wealth Management, we believe the recent Russian incursion may slow, not stop, the Fed’s interest rate strategy, and investors should discuss with their advisors about: A systematic rotation out of treasuries, into technology: we believe a slowing of the Fed’s interest rate policy will see positive repricing of Technology, Consumer Discretion and Communications. According to Merrill Lynch: Stock splits historically are bullish for the companies that enact them. Average returns one year later are 25% (vs. 9% for the market). Recently, splits have become scarce with returns more subdued, but still well above benchmarks. A benefit to large corporations changing their names, for example Google to Alphabet and Facebook to Meta, may be viewed more positively amongst law makers, spawning the potential for future growth. Increased exposure into Energy, Real Estate and Precious Metals: In the near-term we forecast oil consumption to outpace oil demand, however oil consumption could decline in the coming months causing downward pressure on prices in late Q2 to early Q3. We expect inflation to positively impact real estate and precious metals. America First Harsher sanctions will likely follow from both Europe and the US, however, given the lack of exposure the United States has to Europe, domestic investments may provide a sense of immunity to investors. Given the fluid situation in Ukraine, we believe a strong offense is the best defense and recommend investing in US stocks. Although the Russian invasion of Ukraine will likely have little disruption to the US economy, we believe the Fed would be wise to slow their interest rate policy, increasing no-more than 1.50% in 2022. As supply chains disruptions ease and demand for semiconductors settle, we expect inflationary fears to dissipate by Q3, as consumption for energy falls. Investors of multinational corporations deriving their income from Europe should be concerned with the lack of returns, as the dollar strengthens or consider investing utilizing a currency hedged strategy. Disclosures This material is provided as a courtesy and for educational purposes only. This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. Nasdaq is a global electronic marketplace for buying and selling securities. Originally an acronym for "National Association of Securities Dealers Automated Quotations"—it was a subsidiary of the National Association of Securities Dealers (NASD), now known as the Financial Industry Regulatory Authority (FINRA). Indexes are unmanaged and do not incur management fees, costs or expenses. It is not possible to invest directly in an index. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index. All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. Investing involves risk including loss of principal. Investment advisory services offered through Samra Wealth Management, a Member of Advisory Services Network, LLC. 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Available at: <https://www.bloomberg.com/news/articles/2022-02-28/russian-stocks-plummet-in-london-with-moscow-exchange-shut> [Accessed 28 February 2022]. Harris, E. and Bhave, A., 2022. US Economic Week: Fading the Russian Shock. [online] Merrill Lynch. Available at: <https://olui2.fs.ml.com/MDWSODUtility/PdfLoader.aspx?src=%2Fnet%2Futil%2FGetPdfFile%3Fdockey%3D6208-12387613-1%26segment%3DDIRECT> [Accessed 28 February 2022]. Kendall-Taylor, A. and Trenin, D., 2022. Top of Mind: Russia Risks. [online] Goldman Sachs. Available at: <https://www.goldmansachs.com/insights/pages/gs-research/russia-risk/report.pdf> [Accessed 28 February 2022]. Reuters.com. 2022. Russian Central Bank Hikes to 20% in Emergency Move Tells Firms to Sell FX. [online] Available at: <https://www.reuters.com/business/finance/russia-hikes-key-rate-20-tells-companies-sell-fx-2022-02-28/> [Accessed 28 February 2022]. Samra, I., 2022. The Samra Report: 2022: The Year Ahead… (Post Fed Meeting). [online] Samrawealthmanagement.com. Available at: <https://www.samrawealthmanagement.com/post/2022-the-year-ahead-post-fed-meeting> [Accessed 28 February 2022]. Woodard, J., Devery, J. and Harris, D., 2022. THE RIC REPORT: Bullish stock splits, bearish rate hits. [online] Merrill Lynch. Available at: <https://olui2.fs.ml.com/MDWSODUtility/PdfLoader.aspx?src=%2Fnet%2Futil%2FGetPdfFile%3Fdockey%3D6208-12378019-1%26segment%3DDIRECT> [Accessed 28 February 2022].

WAR GAMES