To make sense when trying to analysis the current market, the most important point I can make is that the markets are a discounting mechanism, they discount what they know and look forward. Therefore, while we see tragic scenes unfolding in Ukraine, the week finished with stock markets rising. It would be different if the analysis led to NATO troops versus Russia, but no one expects that at this stage.

The current analysis centres around sanctions, gas supplies from Russia and exposures to Russian banks and clearly that outlook is deemed manageable. Also keep in mind wars make Central banks accommodative and that is good for markets. So, we have moved from an outlook of many interest-rate increases in the US this year, to maybe only a few and that has helped sentiment.

When we look at past market performance following invasions, starting with Vietnam, the outcome has always been a subsequent strong rally.

The situation in Ukraine is of course fluent so sentiment can change quickly and expect up and down days. But it is likely last week so the bottom.

Before the Russian/Ukraine situation the market was already in a high state of volatility. In case anyone missed it, since the start of the year, we are experiencing the ‘Great Rotation’ from growth investing to value investing. For twelve years the market has been soaring, led by the US S&P 500 and Nasdaq tech, indices. Regardless of long held fundamental analysis used to pick stocks, the market has been buying on momentum. If the price is going up, we are buying it, even if the company makes no money or the price to earnings ratio is way out of line.

As a result, the US market is extremely overvalued compared to other western stock markets, The overvaluation is due mainly to CEO’s borrowing cheap money and buying their own stock! (buy backs). This is a great short-term gain but if interest rates rise, and they will, it leaves Frankenstein on the balance sheet.

Most Irish investors will have benefited from the decade bull run as most off the shelf Irish investment products are templated to holding US equity exposure and Western European Bonds. Both of those asset classes are struggling now. Year to date the S&P is down 10%, Nasdaq is down 15% and bond rates are rising which means value is falling.

Despite geo-political issues, the big story is inflation, the recent read from the US is the highest rate since 1981. And now energy prices are under further pressure. We are not used to inflation having lived in an inflation free world for 20 years. But prices are rising across the board. Demand for ‘dirty’ energy is rising well before green energy is available which is likely to lead to an energy crisis for years to come. Nuclear is the only scalable green energy which is why we like Uranium as an alternative investment (up 100% last year and a long way to go)

Amazingly materials and energy only make up 5% of the S&P 500 index. Investors have been gorging on information technology, Communication Services and Consumer Discretionary. That leaves tremendous value in inflation trades, solid companies that have low debt and make money, the boring stuff. Commodities prices are soaring and precious metals, gold and silver which have been ignored for years, offer a great inflation hedge.

To see the fundamental change look at Cathy Wood’s portfolio of ‘memes and dreams’ and crypto (AARK). Recently the darling of the retail investor now the stocks in her portfolio are showing losses of between 20% to 90%.

The Great Rotation from Growth to Value is only beginning and most likely has trillions to go. A lot will depend on how fast interest rates rise but the inflation ‘Genie’ is out of the bottle and will be very hard to control. The argument that inflation is transitory is nonsense and as wage demand increases are awarded inflation will be imbedded. For savers and corporate cash balances this is a nightmare, zero/low interest rates and inflation running at 6% destroys buying power in a few years.

There are plenty of opportunities out there, just not in the same asset classes of the last decade. Investors need to be pro-active and force fundamental adjustments in strategy. Depositors both retail and corporate need to explore ways to offset inflation. That may mean taking on investment risk, so be discerning, strategies for depositors can differ widely in risk terms than those for investments and pensions.

Peter Brown is Managing director of Baggot Investment Partner

Details of our first post covid Seminar is on Baggot.ie

Pbrown@baggot.ie