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War in Ukraine – out of adversity

War is the worst demonstration of our inhumanity to each other. The so called Russian peacekeeping force has become a full blown invasion with wider impacts. Russia supplies 30% of oil and gas to Europe and 11% to world oil production. There will be an impact and wider long reaching effects. This note will summarise these views.

The world is watching a humanitarian disaster unfold while simultaneously viewing a Ukrainian citizenry refusing to take a backward step against a Global superpower. The resolve of the Ukrainian citizenry of all ages to take up arms and fight is strengthening the Western alliance. Already we are seeing supplies and arms from a range of nations (Australia included) flowing from the West to support Ukraine, which is now perched on the border of the Free World as we know it and authoritarian regimes.

European nations have now committed to rearming – France and Germany the most recent for fear of a rerun of the 1930s. A new Cold War has descended upon us, and cyberwar and infiltration are weekly occurrences. Globalisation is now in retreat, as evidenced by Brexit, the rise of Trump and other similar demagogues and Coronavirus, which bought immigration to a standstill across the world as nations closed their borders.

What can we expect and what will be the impact from a wealth management perspective? With oil and gas prices expecting to remain elevated (Oil at US$115 per barrel) there is the potential for this to go higher. Should the Europeans cut gas and oil from Russia, which is a real possibility, we will see markets correct down. Should NATO be drawn into the conflict and in the fog of war where things can go wrong, there are real possibilities for short-term drama and a major market correction. Inflation can only but rise as supply lines remain constrained and as the demand for commodities rise. Ukraine produces 25% of global wheat supplies, and given the circumstances afoot, they will not be exporting this year. And with Russia embargoed, the world will need 11% of its oil and gas from someone else.

This is where Australia comes in. We are the sixth major wheat producer global and our main competitors are Russia and Ukraine. We are having a bumper wheat season and are looking to produce the second largest wheat crop on record. Further, Australia’s exports of liquefied natural gas (LNG) are now second only to iron ore. Supplies around the world will be stretched and Australia will be called upon to supply more. Additionally, with defence spending on the rise around the world the need for raw materials and the stockpiling of raw materials can only increase the demand for aluminium, iron ore, copper, nickel, zinc rare earth materials. In the last reporting season dividends were up 40% on a year previous. From a financial planning perspective there is a bright future for Australian shares going forward. Out of adversity comes …..

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