09 Mar

Discrete assets and the case for pink diamonds

Financial markets have been particularly volatile in the last few trading days, with share prices falling, while commodities continue to soar.

Escalating tensions in the conflict between Russia and the Ukraine are the primary cause, with some of the strictest sanctions imaginable being imposed by Western nations, in the hope that it will force Russia to bring an end to its invasion.

This week’s market update looks at the impact the crisis is having on global markets, and why pink diamonds remain one of the few places investors can feel secure when it comes to protecting and growing wealth.

The latest market moves

In the last few trading days, equity markets have again begun to fall, including in the United States, with the S&P 500 now down more than 12% for the year

The bigger moves though have been in the commodity sector, with a range of commodity prices from oil to nickel to wheat all soaring.

This is evidenced in the charts below, which focus on agricultural commodities (wheat, corn and soybeans), with prices for some of them now at their highest level in 15 years.


Chat of corn prices


Chat of soybean prices


Chart of wheat prices

Source: CharlieBilello, StockCharts.com

The skyrocketing prices for these agricultural commodities are being driven by the fact that Russia and Ukraine account for roughly 25% of the global trade in grains.

Bottom line: Food price inflation, which has already become a challenge for many in the last couple of years, is going to be an even bigger problem for most of 2022, if not longer.

Couple this with the energy price shock and it’s clear many households in the developed world, let alone the developing world, are going to find themselves quite constrained financially.   

Combined, these factors are going to cause profound challenges to investors with most of their money in traditional assets like shares, bonds, cash and real estate.

Given this reality, we remain steadfast in our view that these traditional assets are not the place to concentrate 100% of an investment portfolio going forward.

Investors are panicking – aren’t they?

With commodity prices and inflation expectations soaring, and the risk of a much larger war in Europe growing, it’s no surprise that investor sentiment, according to surveys, has been hit hard.

What is perhaps more surprising is that allocations to equities in portfolios remain near all-time highs, roughly in line with where they were just before the Global Financial Crisis and the COVID pandemic hit.

The divergence between how nervous investors say they are, compared to how they have positioned their portfolio, can be seen in the chart below.

Portfolio Allocations vs Surveyed Sentiment

Chart of allocations vs sentiment

Source: Topdown Charts, Refinitiv, ICI, AAII, II

This is very unusual, as equity allocations in portfolios are typically much lower when sentiment readings are at the kind of levels we currently see.

This suggests one of the following factors, or a combination of the two are at play in the markets today:

  • Given interest rates are near zero, and inflation is higher than 7% in the United States, investors see no point in selling equities, and moving to the ‘safety’ of cash.
  • Investors expect central banks will need to step in with some support for financial markets soon, which they hope will lead to stock prices rising.

In reality, investors may find that going forward, both equities and cash in the bank will go backwards, with both assets losing money in real terms due to pullbacks in share prices, and inflation.

This will continue to support the investment case for hard assets like pink diamonds.

Hard asset demand will be bolstered

While we all hope hostilities in the Ukraine are brought to an immediate end, there is no doubt the events of the last week will have repercussions that will be felt in the global economy, and global financial markets for years to come.

Supply chains, which were already fragile given the impacts of COVID-19, will only be further stretched, while commodity prices, which have been soaring for most of the last two years, have kicked another leg higher.

This has been led by oil, which is up by almost 30% to USD $100 a barrel in just two months, though it’s not just energy prices, with a basket of commodities up by 16% in 2022 so far.

These factors mean that inflation, which is already at multi-decade highs of 7.5% per annum in the United States, is only going to become more of a challenge going forward.

This will act to limit the spending capacity of households, negatively impacting economic growth going forward, and in so doing, may prevent central banks from going through with as many interest rate hikes as they would otherwise have liked to undertake.

Over the long-run, this only makes the outlook for traditional assets like shares, bonds and cash (which was already troubled before this geopolitical flare up), more uncertain.

Given investors will do their best to avoid the risks in the above assets, the demand outlook for genuinely scarce assets like pink diamonds can only be enhanced in such a scenario.

As always, we hope you’ve enjoyed this week’s edition of “In the Loupe” and we look forward to any questions or comments you may have.


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