Recent events in Ukraine and the geopolitical backdrop have caused huge uncertainty amongst investors and indeed, the world at large. The challenges of the last few months have seen a firm focus on the macro picture, with the VIX Volatility Index spiking to the highest level for over a year.
Investors can easily become distracted when macroeconomic noise dominates and business models can be ‘forgotten’. In turbulent times uncertainty increases but change also creates exciting opportunities for well-managed businesses. After all, the fundamentals that result are, in our view, the single largest driver of share price performance over the long term.
The Russian invasion of Ukraine immediately changed the investment landscape. New alliances are being made for collective defence, institutions are evolving and sanctions have become instruments of economic coercion.
This process of change is a constant but also has the benefit of creating new and interesting opportunities for active stock pickers. Companies are constantly changing through corporate activity and management changes. Industries also change, but at a much slower pace than companies. Systems, however, be they economic, legal or social, change infrequently. Yet they can be hugely influential as their effects filter down through industries and ultimately impact the competitive dynamics of businesses.
The energy industry is a timely example. The Russian invasion and insecurity around supply has contributed to higher energy prices at a time when there is still much reliance on fossil fuels. However, over time, we believe that new investment opportunities in domestic sources of energy and renewables should emerge, as investors seek cheaper and more secure energy sources.
Second-order effects are also apparent, most visibly in the form of disrupted supply chains which has led to a shortage of semiconductors and other components. Certain auto manufacturers have been forced to shut down their production sites for many days at a time, highlighting the attraction of companies with short, resilient supply chains and domestic sourcing. Such companies are enjoying a distinct competitive advantage over more complex peers.
A key part of the RBC Global Equity team’s investment process is identifying the strength of companies’ competitive dynamics and as active managers it is our duty to respond and to adjust our portfolios according to how this changes. As Vladimir Lenin once said, “There are decades where nothing happens; and there are weeks where decades happen”, and this quote has never felt as apt as it did in the first quarter of this year.
While we remain cognisant of the tragic human cost of the ongoing situation, as investors it is imperative that we look towards the future. We believe that great businesses with strong competitive dynamics will harness the opportunities of change, despite the current market environment, and will continue to add value for shareholders and for our clients.