Stocks rally should continue as Putin’s war gets scaled down and money runs out

We wanted to dedicate yet another publication to BOJ’s blatant policy errors that is leading to yen’s implosion that we think could spell the end of the bank chief’s reign, even before his term ends in April 2023. But with stock markets bouncing, we felt there were some important grounds to cover elsewhere that could be more useful in scope. 

Although we had been fairly negative on growth stocks and had favoured value names coming into this year, we felt the whole calculus changed when Putin’s war began as probabilities of stagflation had dramatically increased and stock selection became more defensively biased.  Having gone into 2022 arguing that many tech names are exposed to double-orderings and weaker work-from-home trends as pandemic comes to an end, these shorter-term concerns became less important after the war broke out, especially as the sector was initially sold off even more. 

So, just before mid-March, we closed out our semiconductor short picks in Japan which had provided some decent returns this year. We argued that the long-term growth story of technology remained fairly intact with most top firms having strong balance sheets, good pricing power and very healthy order books that should mostly withstand any temporary demand pulls. We also felt that the sector looked far less exposed to exogenous shocks of energy price spikes and general demand destruction being seen in more upstream segments of the industry. 

However, we now think the stock market bounce is looking to become broader based as the war in Europe seems to be turning dramatically in favour of Ukraine. With Russian forces sustaining much casualties as light antitank missiles and handheld drones in determined Ukrainian hands seem to be rewriting the modern tank warfare protocols, Putin’s options are narrowing daily. Moreover, with crippling sanctions looking to tip Russia into depression, war money is running out for any sustained occupation campaign. 

Suddenly, the prospects of Russia actually losing this war has increased dramatically and Putin knows that any further embarrassments could put his survival at Kremlin even more at risk. News that Russian forces would focus on taking control of the full eastern Donbas region could be the first signs that Putin’s disastrous military campaign is scaling down, with some sort of stand-off in eastern Ukraine to be expected. 

Needless to add, any de-escalation of the conflict that entails Russian forces moving back east will be seen as hugely positive for stock markets in general with energy segment a likely exception as the sector could see a big correction on any ceasefire prospects. This will no doubt add yet another layer of complexity to market dynamics as some components of high global inflation start to reverse course, perhaps even helping bond yields stabilise. But we are not there yet!