Back to the USSR

1: Did you know the S&P/TSX reached a new high this week? With many investors selling due to the invasion, this milestone snuck by without many noticing.

Fact is, the Canadian stock market has a heavy weight to energy and materials sectors – both of which are performing well due to skyrocketing prices. From a somewhat disturbing perspective, some areas of the Canadian economy are actually benefiting from the war.

In fact, after the recent rally the S&P 500 is now only down about 7% from its January peak. Of course, beneath the surface many names are in deep bear market territory – e.g. Paypal, Snowflake, Netflix, Meta – so individual mileage may vary. But what these charts show though is that a simple buy-and-hold-the-index strategy would have helped investors avoid most of the recent market pain.

What’s to come for the markets? Who knows. It partly comes down to the whims of an unpredictable dictator. Regardless, there are some notable truths investors must recognize: a) resource prices are likely to remain elevated for some time, b) Russian economic depression is likely already priced into stocks, c) many quality growth names are now reasonably valued, d) we are at the start of a tightening cycle.

Source: Google Finance

2: Western capitalism in Russia is dead and buried. The title of this email (Back to the USSR) is a play on the classic song by The Beatles. Russia is increasingly looking like the USSR of a past era.

Hundreds of Western businesses have abandoned Russia leaving behind stranded assets and investments. Decades of work has dissolved almost overnight.

Russia is now moving to seize what these companies left behind: planes, oilfields, equipment, intellectual property. In a matter of days, Russia has already infringed on classic trademarks (such as the McDonalds logo – see image below). As long as Russia holds these assets hostage the country will not be hospitable to foreign investment. The governance and political risks were always beneath the surface, but now all is in plain sight.

While some may see these newly acquired assets as a boon to the Russian economy, they fail to appreciate the long-term implications of inability to access to capital and expertise. There was a reason McDonalds, BP and Starbucks were in Russia to begin with – they provided intellectual and investment capital that Russia lacked. Now that is all gone.

Compounding this, with access to trade cut off Russia is unable to maintain these newly seized assets for a significant length of time to any degree of quality. Also, Russia may not even be able to export the most basic of goods for some time, as nobody wants to insure or finance trade with the country. As trade infrastructure deteriorates, it will become increasingly difficult for Russian exports to get back on its feet and re-integrate into the global economy.

Some might argue that Russia – formerly the USSR – was once an insular state that lasted about 70 years without foreign capital. While that is true, it was a period of darkness and stagnation for the Russian people. Nothing to be held up as a success.

The Iron Curtain is rising once again, it appears. Russia has alienated itself from the rest of the world and will likely become even more inefficient and ineffective than before.

Still, as a nuclear state, those in power will always have a place at the world’s political table. Unfortunately, it is the average citizen that suffers the most.

McDonald's Russian replacement logo ruthlessly mocked ...

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