Coronavirus and trade wars, state-led industrial espionage, and Brexit are very topical issues, all of which affect companies’ business operations and chances of success. States act in accordance with their own interests and take into account or disregard the effects of their decisions on business operations.
Most publicly listed companies have international operations, and thus various country risks affect production, supply chains, property protection, etc. It is quite a difficult equation for companies that the cheapness of production is in a fairly direct correlation with the weakness of the rule of law, intellectual property rights, and property protection. On the other hand, affordable production in a developing country with a large population also attracts due to its population base; for example, China, India, and Russia have extensive markets despite a low per capita income level.
How do you take country risks into account in your investment decisions regarding production, marketing, supply chains, property (both physical and intellectual property rights), etc.?
Depends on the company. For example, Brembo: a quality company that operates internationally. The political situation in Italy is not very relevant. Mediobanca: a quality bank, but like all banks, quite sensitive if political stability is lacking. I made the investment only after the Emilia-Romagna elections.
Another example is Russia. Risks are elevated, but Russia has a low valuation level (and potential leverage if local popular capitalism awakens).
In my opinion, company characteristics and general sentiment always come first.
Exactly! The guys and girls at Inderes will get the fundamentals straight for old man, and old man will get the general sentiment from the forum. Then it’s just buying and sometimes even selling
Uncle Masse, FA, investing is a pretty simple business if you just understand it
This isn’t really a huge surprise in itself, but Putin’s significance to Russia and other markets is certain. In Russia, a constitutional amendment is being drafted, which, upon its entry into force, would reset the president’s terms in office.
Things are happening again. China has recently increased its role and more strongly expressed its demands for Taiwan to belong to China. Russia has put forward demands for spheres of influence arrangements in Europe and has strongly raised the threat of attacking Ukraine, as well as demanding that independent states near Russia should not be allowed to decide their own affairs. Russia has been in discussions with China recently, but the content of these discussions is unknown.
Now there is a very concrete threat of a Russian attack on Ukraine, as it has concentrated a considerable amount of military force near the border. In addition, Russia, in cooperation with Belarus, has launched various hybrid operations against EU areas, including disinformation campaigns related to immigration, COVID-19, and political matters.
If Russia attacks Ukraine, it is assumed that the West (USA, EU, Great Britain, and other partners) will impose very strong economic sanctions on Russia, and even exclusion from the SWIFT system has been hinted at. Russia is notoriously unpredictable; only Russia itself knows its exact goal in this mess.
However, an attack on Ukraine would have major economic consequences. It is unclear how it would affect, for example, Europe’s energy situation, the availability of raw materials, trade, and money transfers. Among Finnish listed companies, at least Fortum and Nokian Tyres have significant ownership and production in Russia, and Olvi in Belarus. How great a risk would an escalation of the situation pose to these companies and the business operations of other companies?
Would this topic be current now that Russia and partly Belarus have realized this?
I can’t think of a single successful exit or current value considering the Russia risk. For example, Nokian Tyres and Fortum have made decent profits in Russia, but they don’t seem to have even recouped their invested sum. On the other hand, quite a few have gone there with high hopes, burning various large sums of money.
After the annexation of Crimea, I managed to remove Russia-related risks from my portfolio in time. Fortum, Nokian Tyres, YIT, and Stockmann all had to go.
For the past few months, China-related risks have been on my mind: I sold a marginally small Alibaba position. Kone has come down, but its heavy reliance on China is now a red flag for me. It might be that partly for this reason, Kone will not return to my portfolio.
Generally, the China risk through global supply chains is more difficult to manage than Russia: Just think about how much electronics Apple makes specifically in China. If iPhones, etc., get hit with an import ban when China “does a Russia,” it will take a while before production can be moved elsewhere. China also produces the lion’s share of rare earth metals globally: Do factories outside China have enough raw materials for component production if China stops granting export permits for rare earth metals?
Taiwan is critical for many chip manufacturers. Modern devices, from home appliances to cars, are full of chips. My portfolio’s largest investment is NVIDIA, so chip availability is absolutely critical. How would, for example, the cloud business at Microsoft, Amazon, or Alphabet function if hardware availability falters?
There’s plenty to ponder here, as the 2020s will be full of geopolitical and other tensions. Managing portfolio risks now involves many underlying factors that may not be considered in a superficial analysis.
