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US, Russia, Gold & Hedges
There are at present 300,000 bourgeois in the Crimea. These are a source of future profiteering, espionage and every kind of aid to the capitalists. […] We say that we shall take and distribute them, make them submit, and assimilate them.
- Lenin, Collected Works, 4th English Edition, Vol. 31, pp. 438–59, published 1964
Events following the beginning of the crisis on the Crimean peninsula have moved pretty quickly. Whereas last week major markets ignored the situation, with the assumption that the crisis would be contained, there has since been a drop, followed by a resurgence as the S&P and Dow Jones reached new highs on Tuesday 4th March.
Interestingly Warren Buffett recently recommended investing in the equity markets. As I mentioned on CNBC’s Squawk Box on Tuesday (see the clip at http://video.cnbc.com/gallery/?video=3000249455) I think he’s way off-beam if he’s talking about the US markets. He suggests that a 1% drop on US indices makes them a buy; yet my view is that the US is so horribly overvalued, 1% drop doesn't help at all.
However, if there are any further declines in Russian markets, there may be some interesting opportunities. After all, it has some important economic plus points: it has over USD 500 bn worth of reserves; it’s the world’s largest energy exporter; its sovereign debt to GDP is under 10%; household debt is one of the world’s lowest at 14%; it is the least expensive major emerging market; and it’s predicted to soon be Europe’s largest consumer market.
Of course, this opportunity all depends on the price: Russia had been closer to fair value than the US before the Crimea crisis erupted. Whilst the MSCI Russia index fell by 14% on Monday 3rd March, it had recovered half that value by the end of Tuesday. Still, any further drops will create opportunities there and in eastern European countries, such as Poland.
Should the Crimean crisis endure, the energy sector could benefit as it will increase prices in many parts of the world. Natural gas and other energy sources play a large part in Russian strategy.
Away from the Ukraine, I also mentioned in the CNBC interview that to me it looks like time to get some money off the table for gold – I bought in when the price was at 1200. On Tuesday it had gone as high as 1350 and the following day it dropped to 1335.
It’s fair to say that things are pretty volatile from a financial point of view at the moment. I haven’t checked but I wouldn’t be surprised that you could have been a couple of % better off on gold and the best part of 10% up on the Rouble or Russian shares while I was speaking. Of course, short-term movements are always inherently volatile, so that shouldn’t come as a great surprise.
Finally, I was asked what my best hedge was. I think that all hedges are getting expensive at the moment. There has in the past been a small opportunity in the VIX, but given the way it shot up on 3rd March, albeit briefly, I think the ship has sailed on that one right now. In my opinion the best hedge is just to buy sensibly-priced assets and keep a decent amount of cash available for when better opportunities arise.-MBMG Group
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