The Bank of England’s policymakers are expected to increase interest rates from 0.75% to 1% — a level not seen since 2009. The central bank will also increase its forecasts for inflation as the cost of living crisis continues to spiral amid the ongoing Russia-Ukraine conflict.
At its past three meetings, the Monetary Policy Committee (MPC) already upped rates in a bid to rein in inflation, which reached a 30-year high of 7% in March.
The cost of living crisis is predicted to worsen again later this year when the energy price cap will be further revised. There are warnings that inflation could hit 9%, or even double digits, in the autumn.
In March, the Bank of England said, ‘If sustained, the latest rise in energy futures prices means that Ofgem’s utility price caps could again be substantially higher when they are reset in October 2022. This could temporarily push CPI inflation around the end of this year above the level projected for April, which was previously expected to be the peak.”
On behalf of the team at The Smart Cube as a whole, our hearts go out to everyone affected by this ongoing conflict. Our thoughts are with the Ukrainian people.
On 24th February 2022, Russia launched a full-scale military operation in Ukraine. This followed months of hostile activity from the world’s largest country, which escalated on 21st February when Russia proclaimed the Donetsk and Luhansk oblasts of Ukraine, two regions in eastern Ukraine, to be independent and ordered troops to enter both.
In response to the invasion, nations from across the globe have imposed a range of sanctions on Russia. Britain, Japan and the US have sanctioned billionaires and major financial institutions with close links to Russia, while Germany has frozen the Nord Stream 2 gas pipeline project, which had been set to ease the energy price crisis.
With the end of the conflict not yet in sight, as countries around the world impose sanctions on Russia and peace talks continue with limited signs of progress, it appears that the crisis will have a major impact on commodity prices.
Prices of commodities set to rise in the short term
So far, the conflict has resulted in large-scale panic buying of key commodities coming from Russia and Ukraine, which has caused a sharp upward rally in commodity prices. An example of this can be seen when looking at nickel prices. As Russia accounts for 49% of world nickel exports, the Russia-Ukraine crisis has led to a shortage of the base metal, causing its price to spike. Further to this, the conflict has prompted short covering by businesses, including the Chinese group Tsingshan – the world’s largest nickel and stainless-steel producer. Short covering is the process of purchasing borrowed securities to close out an open short position at a profit or loss, while it also involves the purchase of the same security that was initially sold by the holder of the position. As such, this action has further contributed to driving the price of nickel up, with the London Metal Exchange forced to halt trading in nickel on Tuesday 8th March after prices surged 110% to top $100,000 per tonne.
Prior to taking a closer look at the expected price increases of commodities, it is worth mentioning that the following estimates have been calculated using a combination of a statistical price forecast model, in tandem with leveraging monthly and daily price data over the last 20 years. This has allowed for sensitivity analysis to take place, whereby the dynamic impact of similar conflicts and resulting sanctions on commodity prices can be evaluated – like the 2014 Russia-Ukraine conflict.
The expectation is that the continued military conflict in Ukraine is set to see the prices of a range of commodities increase sharply in the short term. For example, the prices of crude oil, palladium, platinum, and aluminium are in line to go up, due to Russia being a major producer and exporter of these raw materials. Looking at this in more granular detail, the price movement (between March 2022 and May 2022) of crude oil is anticipated to be between 10 to 12%, as Russia is the second-largest producer in the world, meaning there is the possibility of disruption to crude oil supplies. Adding to this, metal prices are also expected to surge, due to Russia playing a major role in the global mining of palladium (45% of global production), platinum (15%) and aluminium (6%). As a result of the continuing conflict, it is expected that the prices of these precious and base metals will increase by between 10 and 18%.
Further to this, the price of natural gas is anticipated to rise, as Ukraine is an important transit route for Russian natural gas flows from Europe. With Russia accounting for roughly 40% of the European natural gas supply, serious disruption to the supply of the energy product is a distinct possibility. This could see the price movement of natural gas increase from anywhere between 18 and 28%. Additionally, agricultural products are also expected to experience a spike in their prices, due to Ukraine being the “breadbasket of Europe”. In fact, Russia and Ukraine are major global exporters of both corn and wheat, accounting for an estimated 30% of global wheat exports. As such, the price of corn is expected to increase by 10 to 18%, while wheat is set to rise by 12 to 20%.
However, if Russia decides to bring its invasion to an end, or if Western countries introduce active initiatives in an attempt to stabilise energy prices, then the expectation is that commodity prices will fall significantly, returning to pre-conflict levels. For example, the prices of crude oil and natural gas have started falling on the back of the US announcing a record release of one million b/d from the US Strategic Petroleum Reserve over the next six months, in addition to The International Energy Agency (IEA) agreeing to release up to 60 million barrels from their respective strategic reserves. In the event of the conflict de-escalating, crude oil is expected to fall by a further 10 to 15%, while nickel is in line for a drop of between 13 and 17%. Nevertheless, at this moment in time, this scenario unfolding is difficult to predict with any certainty.
What can organisations do to ensure business continuity?
Firstly, it is imperative for companies to actively evaluate alternative suppliers to ensure business continuity. Businesses should be prepared to switch to or identify alternative sources for procuring essential products and services in the event of disruption due to a crisis. An example of this can be seen with the uncertainties Russian suppliers and bankers are having at present, which has resulted in Tata Steel seeking alternative markets for coal imports, choosing to look beyond Russia and instead purchase coal from other regions, such as North America. By having a range of different sources and suppliers, companies ensure that they are prepared in the event that the situation in Ukraine drags out, as they can easily purchase commodities through alternative avenues.
As well as this, businesses must continuously monitor the situation, in terms of the conflict itself, as well as the restrictions and sanctions being imposed. This allows organisations to stay up to date on the impact the crisis is having on the supply chain in light of the events taking place and plan for multiple possible eventualities. For example, companies can react quickly and raise the prices of their products if the price of the commodity they require for manufacturing has escalated significantly. Businesses can also brace for cost increases by allocating provisions in anticipation of this possibility, while they should also eliminate or freeze all non-essential spending.
Furthermore, there are a number of other actions organisations can take to prevent supply chain disruptions during such geopolitical events as the ongoing Russia-Ukraine conflict. Companies should liaise with suppliers to identify alternative payments methods, while they should also address immediate financial and cybersecurity concerns. This includes reviewing financial hedge positions in light of the volatile Russian and Ukrainian currencies, in addition to identifying and minimising vulnerabilities in cybersecurity.
To ensure continuity, it is vital for businesses to constantly monitor the situation as it continues to evolve and develop, while they must also actively evaluate alternative providers and distributors. By doing this, organisations will be able to limit the potential damage caused by supply chain disruptions during geopolitical conflicts, such as the one ongoing between Russia and Ukraine.
With ongoing chaos caused to industry in the east of the country and a blockade of Black Sea ports in the south, Ukraine’s GDP is projected to drop by approximately 45% in 2022.
The World Bank warned that Russia will likely also fall into recession, as will many other countries surrounding Ukraine, with some likely to soon require external support from international agencies to prevent them from defaulting on existing debts.
On Sunday, the World Bank said, “The war is having a devastating impact on human life and causing economic destruction in both countries, and will lead to significant economic losses in the Europe and central Asia region and the rest of the world.”
“It comes at a particularly vulnerable time for ECA as its economic recovery was expected to be held back by scarring from the pandemic and lingering structural weaknesses. The economic impact of the conflict has reverberated through multiple channels, including commodity and financial markets, trade and migration links, and the damaging impact on confidence.”
When 2021 ended, it was as if the whole world breathed a sigh of relief. Although we still felt the effects of the Covid pandemic, we were ready to leave the last two years behind and move on to better and brighter times. So when the news broke of Russia’s invasion of Ukraine on February 24, it sent shockwaves across the globe.
To condemn Putin’s war, western leaders announced some restrictive economic measures to target Russian financial institutions and individuals. But as Russia is one of the leading suppliers of gas and oil worldwide, these sanctions have seen prices for these resources shoot up in the US and UK and add further pressure to the already volatile economies. In fact, the US is experiencing its highest inflation in 40 years and the UK is currently facing its worst recession since the 1970s, and many experts predict we are on the brink of the next big global financial collapse.
What does this mean for investors and their money?
During times of crisis, many will opt to put their money into investment funds, like the S&P 500, or ISAs to mitigate the risk of any major financial losses and hopefully still be able to grow their investment portfolios. But indications show that the S&P 500 is on a downward trajectory and may no longer be the most future-proof option for investors. Similarly, the money put into ISAs will lose its purchasing power as inflation levels rise.
What can investors do to mitigate the negative effects of inflation?
Enter alternative investments. Alternative investments like gold, wine, art, and real estate are examples of options that have for many years been used by investors as a hedge against inflation. Referred by many as ‘inflation or recession proof’ these alternative investments, alongside commodities and cryptocurrency, have proven to yield higher returns despite financial crises.
To gauge how recession-proof the different alternative asset classes are, we look at their performance during historical periods of recessions or market turmoils. For example, between December 2020 to December 2021, inflation grew by 7%. Meanwhile, wine grew by 19.10%, art by 58.81% and Ethereum by a whopping 2724%. So, it is understandable why during times of crisis, financially savvy investors turn to these options for investing and to safe-up their portfolios.
However, there is a less talked about option that has been going through a revival, despite being one of the oldest forms of investment assets - coloured gemstones. In the last decade, coloured gemstones have experienced some of the biggest price jumps in history. In 2015, the world’s most expensive ruby was sold at auction: a 25.59-carat gem, known as the Sunrise Ruby, for over £22 million. Just two years later, the world’s most expensive emerald The Rockefeller Emerald, weighing an impressive 18.04 carats, was sold for just over £4 million.
Many people aren’t as clued-up on these unsung heroes of the alternative investment world and their lucrative yields. Compare it to one of the more known alternatives, gold. One kilogram of gold has a value of approximately £50,000, whereas one kilogram of fine rubies is worth upwards of £150,000,000, making it 3000 times more valuable.
Which gemstones are best to invest in?
Leading the gemstone space in terms of value and growth potential are rubies, sapphires and emeralds, which have increased in value by 5-8% per annum since 1995. And their upward trajectory continues. When re-certifying our own gemstones through Gemological Lab Austria (GLA), one ruby was valued over 19% higher in November 2021 compared to its initial valuation in September the same year.
Similarly, upon re-certification in 2021, a selected sample of sapphires experienced an average increase of 15.7% compounding annually, with a 6.1 carat Sri Lankan Sapphire at the top end of the spectrum, which had a total increase of a staggering 194.1%.
Much of the rising popularity of coloured gemstones is due to the growing awareness - primarily via the internet, social media and marketing - but also due to developments in recent years that have boosted consumer confidence, such as widespread certification, further industry transparency, and gemological analysis.
And as a result of the Covid pandemic and the economic uncertainties that have followed, more people are seeking ways to make smart investment choices that will strengthen their portfolios and make more lucrative returns in the long run. Crypto has become one of the more popular alternatives for financially ambitious investors during this time, but it’s a highly volatile space and therefore comes with a lot of risk.
But the initial charm and excitement of investing in this space are beginning to wear off - Bitcoin for example has lost half of its value since hitting a record high in November 2021.
Taking coloured gemstones’ growing popularity in the last couple of decades and combining it with more financially curious and risk-averse investors entering the market, we can only expect these precious gems to increase even more in value over time and become a leading alternative investment option. They really are called precious for a reason.
About the author: Dr Thomas Schröck, CEO and Founder of The Natural Gem.
Face-to-face negotiations between the two nations are set to begin later on Tuesday in Turkey.
"In February hopes were still high that consumer sentiment would recover significantly with the foreseeable easing of pandemic-related restrictions,” Germany’s GfK commented. "However, the start of the war in Ukraine caused these hopes to vanish into thin air. Rising uncertainty and sanctions against Russia have caused energy prices in particular to skyrocket, putting a noticeable strain on general consumer sentiment."
The FTSE 100 rose 0.7% as UK supermarket prices went up at their fastest pace in almost ten years in March. Meanwhile, France’s CAC was up 1.2% and the DAX rose 1.1% in Germany.
Across the pond, Wall Street’s S&P advanced 32.46 points, or 0.7%, to 4575.52, reaching its largest one-day percentage increase since June 2020. Meanwhile, the Dow Jones increased 0.3% and Nasdaq was up 1.3%
Ukraine later announced that the fire, which broke out in a training building at the Zaporizhzhia compound, had been extinguished. However, speaking to Reuters, an official said that his organisation no longer had communication with the plant's manager after Russian forces took control.
According to Russia’s defence ministry, the plant is working normally. It blamed the fire on what it is calling a “monstrous attack” by Ukrainian saboteurs.
According to MarketWatch, Dow Jones Industrial Average futures dropped 273 points or 0.8% to 33,462. Meanwhile, S&P 500 futures fell 36 points or 0.8% to 4,323. Nasdaq-100 futures dropped 103 points or 0.7% to 13,926.
While the situation at the nuclear power plant is seemingly averted, Russia’s control over the plant that provides more than one-fifth of Ukraine’s electricity is a huge development after eight days of brutal conflict.
The EU has voiced a series of concerns about Mordashov, including claims that Rossiya Bank, in which Mordashov has a financial interest, serves as the “personal bank” of senior Russian officials who directly benefited from Russia’s annexation of Crimea in 2014. Additionally, the EU also claims that the media businesses Mordashov is invested in helped to destabilise Ukraine through pro-Russian television stations.
In a statement, Mordashov said he failed to see how his inclusion on the EU sanctions list would help end the conflict in Ukraine. “I have absolutely nothing to do with the emergence of the current geopolitical tension,” Mordashov said.
In 2021, Mordashov just missed out on a place on Forbes’ list of the top 50 richest people in the world, coming in with a ranking of 51. At the time, Mordashov’s personal net worth was estimated to stand at $29.1 billion.
David Morrison, Senior Market Analyst at Trade Nation, shares his opinion on what stock you should sell this week, and what stock you should buy.
Sell: Intel
With the extended sell-off we’ve had since the beginning of this year there are fewer shorting opportunities now than two months ago. On top of this, my current investment thesis is that global stock indices, in particular the S&P 500, are close to bottoming and should soon start to bounce quite aggressively. But the semiconductor designer and fabricator Intel is currently out of favour and may remain so. Over the years there has been much criticism of the company’s direction which even the replacement of CEO Bob Swan by Pat Gelsinger last year has failed to halt. In a big change of direction, the company intends to spend over $43 billion on new chip fabrication plants, for Intel chips but also other chip designers. This may pay off over time but could weigh on the company in the near term. In addition, Intel sources vital raw materials such as neon and palladium from Ukraine and Russia respectively. If hostilities result in further sanctions and supply disruptions, then this could be a serious issue going forward. The stock is currently testing support at around $44. A sustained break below here could signal further weakness for the chip giant.
Buy: Roku
While you wouldn’t know it from the current state of the markets, the fourth-quarter earnings season has been a great success so far. According to FactSet, of the 80% of S&P 500 constituents that have reported, 78% have beaten expectations for both revenues and earnings per share. That’s why the overnight collapse in the share prices of Netflix, Meta Platforms (Facebook) and Peloton following their earnings releases was such a shock. Netflix slumped 21%, Meta lost over 24% and Peloton plunged 33%. It was their weaker-than-expected subscriber numbers that did the damage, as active users are a key metric for tech companies. Roku also suffered. The streaming service fell 29% in the first few hours following its own update. That meant the stock was down around 75% since its peak last summer. It is yet another of those companies that outperformed during the pandemic and is now paying the price. But while the last quarter was disappointing in terms of missed revenue expectations and guidance for the current quarter, it’s possible to argue the reaction is overdone, with current market conditions playing a large part. The poor results were mostly down to supply chain disruptions, which, hopefully, are being ironed out. In addition, Roku beat expectations for new sign-ups, and the average revenue per user on a trailing 12-month basis was up 43% from the same time last year. By hours streamed, Roku is the top platform in the US, Canada, and Mexico. Lastly, the company reaffirmed its revenue guidance for 2022. The company is aggressively investing for growth with a long-term perspective. It’s certainly not Peloton. I know this is a bit of a punt, but it is hard to pass by this opportunity given the sharp selloff in the stock price.
Disclaimer: The information contained within this article is for educational and entertainment purposes ONLY. The commentary provided is the opinion of the author and should NOT be considered as personalised advice or recommendation. The information provided in this article should NOT be a person’s sole basis for an investment decision. All investments are made at the reader’s own risk.
