HindeSight Letters #85 February 2022 Newsletter - FREE TO READ ARCHIVED EDITION

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CONTENTS

OVERVIEW

HINDESIGHT PORTFOLIO SELECTION

INVESTMENT INSIGHTS

OVERVIEW

War in Europe, again. Without doubt, a terrible tragedy with loss of life and refugee displacement. For the last twenty years, Putin’s Russia has been building their army and upgrading their weaponry, while we have been more focused on changing our gender neutral toilet signs and use of personal pronouns. 21st century insanity is apparent everywhere. 

Whether this remains a short-lived regional conflict or develops into a far more widespread situation, with the nightmare end-game potential, we can only hope for the least worst outcome. While it is easy to draw the obvious conclusion that Putin is an evil dictator, hellbent on recreating the old Soviet Union, it is wise to try to understand more of the history, not just Russian-Ukrainian history but also, the decisions and actions the world has taken, that has brought us to this awful time. 

The link here, Ukraine and Russia: People, Politics, Propaganda and Perspectives written in 2015 is as good a starting point as any for more understanding of the situation. 

The trouble as usual, for most, is trying to form any kind of original opinion based on real facts, unaffected by the current media storm. Trying to get to the truth requires not just a good understanding of historical events, but also having to piece together snippets from current reporting of events. All media is bias, either by slant or omission, and typically country dependent. Most UK readers of the BBC or Daily Mail, naively believe they are getting an unbiased opinion and the truth, no different from the readers of the main media outlets of other countries, despite the recent challenges of everything potentially being, ‘Fake News’. I have found it worthwhile, especially during crises, to read everything, whether it is Tass News in Russia, Al-Jazeera, BBC, Le Monde or the New York Times if I want to try to get somewhere close to the truth, maybe 10% truth allocation in each.

A century elapsed from the battle of Waterloo in 1815 to the outbreak of WW1 in 1914, a century of relative prosperity and peace in Europe. Since the end of WWII in 1945, while there have been regional conflicts in the Balkans among others, while still tragic, we have avoided actual escalation. But, in 2022, almost 80 years on, we are horrified that in our ‘civilised’ world, a European sovereign country could be invaded by another, no doubt, similar to how our predecessors felt in the peaceful and modern days of 1914.

It is always assumed that the ‘people’ are not behind a madman dictator, that the generals or the population will rise up and effect a coup, that their election was rigged and not democratic. History, again, tells us to challenge those natural assumptions. Of course, the average person doesn’t want war and killing, but many of the reasons that lead to supporting the madman to remain in power who does are more widespread, certainly before the war starts.

Source: http://www.e-ir.info/wp-content/uploads/2015/03/Ukraine-and-Russia-EIR.pdf

It seems clear that Putin’s view on the history since the collapse of communism in 1991, differs from the West’s. A once great superpower, if not respected for their actions, certainly for their size and firepower, only to relegated to ‘a regional power’ by Barack Obama, and Europe within 20 years. It would suit the West’s narrative if Putin, ‘The Madman’ was taken out, and we could pin all the blame on a single individual, and move back to ‘peace and stability’. But, I think that is naïve. The Russians are a hard race, they lost 25 million in WWII, Britain less than 400,000. They don’t want to be regarded by Barack Obama or anyone else as a regional power, they want respect but in general, they crave to be represented by a strongman.

A long time ago, I was privileged to have dinner with Oleg Gordievsky, former KGB Bureau Chief in London and British double agent. He told me, as his subsequent books also mentioned, the Russians have always felt threatened by the West, it is in their very psyche, they believe that the West is capable and willing to attack them first, even in the case of the dreaded first strike in nuclear war terms. The scale of the economic sanctions on Russia, as I write this, are epic and threatening to the Russia state to the core. Facing up to a ‘bully’ in such a united fashion is unprecedented, however just, but threatening a country to that extreme, when they still hold the largest nuclear arsenal is a very dangerous escalation. If we are fortunate enough to be able to write about this period at a later date, comparisons must surely be made with The Cuban missile crisis in 1962.

Just as there has been much historical debate on the creation of Hitler, stemming from the harsh war reparations enforced on Germany by the Allies post-WW1, Putin may well be a creation of the ‘lack of respect’ the West has shown and the threat he perceives. While his belief that the NATO expansion, that has encroached on 14 ex-Soviet satellites since 1997, pushing US missile bases ever closer to Moscow, was a breach of a vague 1995 agreement that the countries would remain neutral, but, with the threat now, of Ukraine joining NATO, is clearly his red line. 

Of course, the blame to invade and cause terrible loss of life was ordered by Putin, with an electorate that may well have become less supportive, but, now less able to change the course of history, again, very similar to Hitler’s power base development in the 1930’s.

He is certainly held accountable and should be, but, it is concerning that his rumoured health concerns, not just Parkinson’s, but, observation of fat cheeks, similar to post-chemotherapy steroid use, may well have prompted the timing of the invasion. Not good.

Some of the other events of the last few decades are worth mentioning, to understand more in respect of the timeline to war in Ukraine, where we all hope it stops.

• In Europe, we have constantly underspent on defence budgets, in % of GDP, or in real terms, many countries not even close to the 2% of GDP minimum that NATO requires, happy for the US to shoulder the burden, even when Trump called us out. German has an army of only 64,000, today’s announcement that in the face of a ‘new’ threat in Europe, they are going to spend more, seems ridiculously late and short-sighted in the past. I guess toilet signs and costly immigration policies will have be trimmed back! Russia has 12,500 tanks, the UK has 227, such insanity to show this military weakness/imbalance at any time.

• The left wing mass media in the US, with all their power have managed to place the oldest and weakest US president in history in the hot seat, barely able to stay awake during discussions, and with the recent debacle in Afghanistan, the US have shown their declining ability. Notwithstanding, the lingering rumours of Biden-Ukraine corruption. I doubt very much if Putin would have invaded if Trump was in the White House, not because Trump is a strong man, but because he was an unstable amateur whose unpredictability would have been difficult to calculate for.

• The Europeans who seemingly have no understanding of basic maths, have forced such a rapid green agenda for energy, influenced by climate change activists like Greta Thunberg, have made countries reliant on Russian oil and gas, and weakened as a result.

• The UK Brexit vote that has isolated the UK from the continent and created new barriers

• The US arms and weapons companies, some of the largest and most profitable in the world who constantly have to find new markets to sell their weapons to, who behind the scenes have been strong proponents of the relentless march east of NATO, with missiles closer to Moscow. Ukraine is the 4th largest recipient of US military hardware. Everyone rightly accepts that a sovereign country can have elections and embrace their own economic and defence policies, but also seems to think that they have the right to join NATO, and NATO should accept them. The statement that is often made by NATO, is this:

If democratic states want to join NATO; if they are able and willing to contribute to the security of the Alliance; and if their membership in NATO enhances EuroAtlantic security; then the Alliance must remain flexible enough to consider their membership. Indeed, for these countries, membership is simply the logical conclusion of ever-deeper partnership.

Surely, some thought must be given then, that if membership to a country like Ukraine or others, if it reduces Euro-Atlantic security rather than enhances it, it should better to state this clearly. It is a balancing act, and the stakes are the highest imaginable.

• The decadent woke generation who are offended by everything, who place much emphasis on correct personal pronouns, apparently even at MI5/6, political correctness is paramount, surely actual spying and intelligence gathering is more important? It clearly demonstrates the weakness of our current society, certainly in Russia’s eyes.

• The CEO’s of the world, notably in the US, in a desperate quest for profit, (arguably their job), but with little government intervention have outsourced huge production to China. The last penicillin factory in the US closed in 2004, now, 100% of antibiotics come from China and India/ China, as well as most of the rest of the medical needs

• Most of the world’s semiconductors, the very essence of modern life, are made in Taiwan, which is threatened daily by China, and it may only be a matter of time, before we are discussing another invasion

• Politicians and populace led national identity fevers,’ proud to be ……’, whether it is in Ukraine or Scotland create more divides than cohesion and peace. History has told us many times, nationalism, inevitably becomes extreme and the outcomes are never good. Leave national identities to sporting events only.

It should be no surprise that the Russians, not only felt threatened but also saw such weakness in the West’s societies, that they felt emboldened to start a new European war. But, surely, as we turn Russia into a shunned, isolated, pariah country, the question must be, what next?

• A quick turn North through Belarus and close the NATO weak point of the Suwalki gap, locking in the Baltic Countries, leading to a new Iron Curtain

• A Chinese-Russian declaration of alliance.

Just as in 1939, when the world was shocked by the Soviet-German non-aggression pact, before they both invaded Poland, it must be equally possible that China and Russia will become more aligned. The increased trade deals and de-dollarisation between the two countries, as well as the rumoured agreement between Putin and Xi-Jinping, that no Ukraine invasion would take place until the Chinese Winter Olympics have finished, must keep the geo-political analysts awake at night. A Chinese-Russian alliance, after Ukrainian and Taiwan invasions, would leave the rest of the world stunned, that a new world order was created, while we were arguing over Partygate and lying down on the M25 protesting.

Assuming we get past nuclear Armageddon, any future student of history of this period will no doubt, marvel at the insanity of all our countries’ actions in the last few decades. 

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HINDESIGHT PORTFOLIO SELECTION

SHARE OF THE MONTH FEBRUARY 2022

JM

Johnson Matthey is a British multinational speciality chemicals and sustainable technologies company headquartered in London, England. It is listed on the London Stock Exchange and is a constituent of the FTSE 250 Index.

Over the last six years, JMAT has appeared in the Hindesight Portfolio three times, returning 32%, 21% and 25% on exit. We have added it this month again, although I have been asked a few times already, why? Looks like only bad news, and the share price certainly reflects the average analyst’s view. But, I think that is the point.

Since last year’s decision to exit the market for battery metals, analysts and investors have focused very negatively on the one off charge for this, wiping out much of 2021’s profits and the concern that they will go ex-growth. As far as I can see, this was a strategic decision by the management who believed that this was no longer a profitable growth path for the company and shareholders. Johnson Matthey has been around a long time, at this valuation, with the stock price, almost 50% lower than last year’s highs, I am going to put my faith in the management and of course, the HindeSight Portfolio’s algorithm for a recovery over the next year.

Resilient performance in a challenging environment

Note: Sales, operating profit and earnings per share (EPS) are underlying measures - before profit or loss on disposal of businesses, gain or loss on significant legal proceedings together with associated legal costs, amortisation of acquired intangibles, major impairment and restructuring charges and, where relevant, related tax effects. Comparator period is 1H 2020/21

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INVESTMENT INSIGHTS

The crisis in Ukraine, and the scale of sanctions being enforced on Russia, will have wide repercussions for supply chains and prices. Between Belarus, Ukraine and Russia, the huge exports to the world of everything from grain to gas, iron ore to sunflower oil, matter. Prices will rise and cost of living increases will happen, without question for the end consumer. Profit margins will have to suffer, as the essential/discretionary spending ratio changes dramatically, as we lurch from a world pandemic into a world war crisis. Despite some stock markets like Germany, now down 15% on the year, most equity markets are still holding far higher than the risk premia that I believe should be being priced in. Is it still the power of liquidity, from all the central banks’ funny money printing or blind optimism from the masses as they can’t possibly imagine that the parade will have to stop.

Apologies for the brevity of the Insights section this month, but with the situation in the geo-political arena being very fluid, the financial markets are prone to act to the last news event. But, in general, I think if we focus on inflation and growth estimate declines, with a WW3 backdrop, it is really straight forward to be defensive at this time. 

• Hold commodity based equities, precious metal companies etc 

• Focus on low p/e value equities and reduce high p/e growth equities 

• Hold precious metals

The Hindsight Portfolio closed three positions, RDSB, IMB and BATS this month, for an average of 46% gain, while adding two value stocks, TATE and ULVR, but continues to be underweight and cautious. 

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