It is almost unbelievable. Just as the world was beginning to pick up the pieces from a global pandemic, a new crisis came along. Rising geopolitical tensions are wreaking havoc, exacerbating supply chain issues, labor shortages, and increasing costs of raw material, finished goods, and transportation that were already causing challenges.
Start with the U.S. dollar – the preeminent global reserve currency that has ruled the roost for years. The tide may be turning, as the Russian invasion of Ukraine has set off ripple effects that are upending the balance of power. Other nations were shocked and alarmed when the U.S. government seized the dollar reserves of the Russian Central Bank. Now several neutral countries like India, China, Turkey, Brazil, and Switzerland are using the ruble as a means of exchange to continue trade with Russia. This sudden demand for the ruble has raised its value above pre-war levels, an unintended consequence of sanctions, to be sure.
Furthermore, Russia is flush with commodities that many European states rely on. They too must trade in rubles to obtain those goods. Back home, Russian-dependent industries in the United States have been left reeling.
King of all commodities, it seems, are oil and natural gas. BRIC nations (Brazil, Russia, India, China, and South Africa) are massive consumers and import fuel in order to power their economic growth. China is now in talks with Saudi Arabia to purchase oil in yuan instead of the dollar. Meanwhile, the U.S. is considering lifting sanctions against Venezuela to ease Americans’ pain at the pump, even as local gas stations begin to program their pumps for double-digit prices. This could be the straw that breaks the economy’s back.
The world cannot function without a fuel supply, and neither can our bodies. Food prices are on the rise across the globe and inflated prices can be seen at any grocery store in America. Food shortages in Europe and Africa will worsen due to the conflict in Ukraine and we expect the impact to peak towards the end of the year. It is a looming crisis.
Unfortunately, all this talk of inflation puts the Federal Reserve in a tight spot. Left with no other options, they must aggressively raise interest rates to combat the rampant inflation. While the long-term goal is to fight growing prices that are pinching pocketbooks, they may cause some initial pain in the short term. Inflation is also eroding the profits of corporations, which cannot raise their prices too fast without scaring off consumers and stunting post-COVID economic recovery.
Interest rates will have ramifications of their own. Over-leveraged companies that benefited from periods of more lenient lending policies will find themselves unable to pay their debts. Homeownership will become unaffordable for first-time buyers. (Of note, home sales have fallen for the past 3 months, but this is more closely linked to a lack of supply rather than demand.)
It’s a lot to process and a lot to consider. Given what’s in play in today’s economy, we believe the following sectors are poised for growth:
Real Estate Investment Trusts (REITs): With high inflation and soaring rent prices, real estate is hot. Smart money is already invested here, with valuations that seem high at today’s prices.
Gold: Though trending downward for a few months, gold has been a traditional hedge against inflation. As the perfect shelter from economic uncertainty, we anticipate it’s on the cusp of a comeback.
Luxury Brands: Always in demand with high price elasticity, luxury goods from cars to watches can preserve or even increase their margins even in challenging times. They’re not immune to supply chain disruptions, but they are particularly good at weathering storms in this current market dynamic.
Undervalued Stocks: Select companies in healthcare, fin-tech, shipping, logistics, and building material supply are at the cusp of massive growth. Coupled with soaring demand these companies will be well-positioned to increase prices and preserve margins.
No one can foresee the future, just as we couldn’t have foreseen COVID-19 or the Russian invasion, but paying attention to the tectonic shifts these twin crises have set off can pay dividends for smart investors.
