Conditions of war… With the Ukraine crisis, we observe the rising movement of all kinds of commodities. Oil due to energy deficit risks, wheat for food production deficit and of course gold to protect risky positions. At this point, it can be thought that the movement stemmed from war conditions in general and inflation conditions in precious metals. On the broader plane, it is necessary to consider the dynamics in risk avoidance mode or rotation movements in terms of sustainability.
Financial markets, sectoral rotation… With the changing perception, some risks have accumulated on growth-oriented stocks. There are financial and non-financial factors such as the direct operational situation with Russia, the rise in commodity prices that will increase production costs, and the thought that interest rates will increase due to general inflationary conditions. Sanctions, of course, will also affect the credit markets. This will in a sense disable the conditions tied to the Fed, even if the rate hikes are not 7 but 4, or cause them to lose their former importance. Because investment activities and, accordingly, the credit mechanism will be affected by the changing economic perception and the risk undertaken. If we ask where is the profit in the resulting situation, the defense industry comes into play. Of course, Europe's increase in defense spending due to the Russian threat means gains for multinational defense companies. In the energy supply deficit that will arise from Russia, shale gas and oil have gained a strategic importance for global production at the moment.
Another important opportunity will be in the renewable energy group. The rapidly changing political balances in the world and the effect of the embargo will of course bring along the strategy planning to reduce the dependence on Russian energy. Therefore, just as environmental and epidemic concerns are effective in transformation after Covid, we will now see a world where the developed world will focus its investments on environmental energy technology due to the war economy. In the transformation to clean energy, there will be a situation that goes beyond the ESG criteria. Investments such as solar energy and electric vehicle technology will achieve serious growth.
Comparison of the last 1-month S&P/TSX Renewable Energy and Clean Technology Index with the S&P 500 (normalized by Factor 100)… Source: Bloomberg
Conclusion? Just as whether the risk is permanent or not depends on the war conditions, it will be necessary to consider the perception of the current risk in the price scissors of the instruments. However, when you switch from a short-term approach to a long-term approach, it is necessary to analyze the evolution of sectoral trends correctly. Just as Covid brought technology and digitalization to the fore, the same evolution now revolves around resource allocation in energy use. The fact that factors other than ESG will be used in the need to get rid of alternative sources and fossil fuels will mean a change in perception in investments.
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