Daily Brief: Russia Isn’t Backing Down, And Investors Are Backing Away

Daily Brief: Russia Isn’t Backing Down, And Investors Are Backing Away

about 2 years ago3 mins

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Another act of Russian aggression sent ripples through markets on Tuesday, but you know what they say: even Vlad publicity is good publicity.

What does this mean?

The West has been concerned that Russia might invade Ukraine for a few weeks now, and Russia’s decision on Monday to recognize the independence of two separatist Ukrainian regions – and to subsequently install troops in both of them – won’t have done much to help matters. Investors certainly didn’t like it one bit: global stock markets fell at the prospect of all-out war, and the prices of gold and government bonds soared as everyone rushed to buy safe-haven assets. The price of oil shot up by 5%, as the prospect of a disruption to supplies of the slippery elixir took hold. And with Russian sanctions looking more and more likely, the Russian ruble rounded things off by collapsing to a 15-month low.

Russian ruble
The chart rising shows ruble weakness

Why should I care?

For markets: Inflation up, growth down.

Just the news that Russia – the world’s third-biggest oil producer – might be edging closer to an invasion sent the price of oil up to nearly $100 a barrel. That alone could put more pressure on the global economy, but JPMorgan has war-gamed a scenario where we hit $150 a barrel this quarter. If that happens, the investment bank’s forecast for global inflation in the first half of the year would double to 7.2%, and global economic growth would shrink from 4.1% to 0.9%.

Oil price

The bigger picture: A lose-lose for central banks.

That combination of higher inflation and slowing growth would put central banks in a Catch-22. One of the best weapons in their arsenal to limit inflation is to raise interest rates even quicker than they’d planned, which would slow down borrowing and spending. But they’d also be aware that those same interest rate hikes would, by definition, only make the economic slowdown worse.

Keep reading for our next story...

Volkswagen Is Planning An Initial Public Offering Of Porsche

VW image

Volkswagen announced on Tuesday that it’s planning to list Porsche on the stock market, as the world’s biggest carmaker really leans into its midlife crisis.

What does this mean?

Volkswagen is desperately trying to redefine itself, having announced in December that it’s increasing its investments in electric vehicles (EVs) by 50% over the next five years. But that money has to come from somewhere, and an initial public listing (IPO) of Porsche – which was taken over entirely by Volkswagen in 2012 – could be the answer to the carmaker’s prayers. It’s not clear how many shares Volkswagen plans to sell, but even a handful should go a long way: Bloomberg estimates that Porsche’s IPO could value the company at as much as $96 billion.

VW stock
Source: Google Finance

Why should I care?

For markets: Porsche doesn’t need Volkswagen.

That $96 billion valuation is even more impressive when you consider that Volkswagen is worth $129 billion, while Porsche’s supercars make up just 3% of the vehicles Volkswagen sells. So if Bloomberg is right, Porsche accounts for 74% of Volkswagen’s current market value. But Porsche is a lot further ahead than Volkswagen in its EV plans, with analysts expecting roughly half of its sales to be electric by 2025 – five years earlier than its parent company. Throw in Porsche’s much higher profit margins than the rest of Volkswagen’s businesses, and the luxury carmaker is arguably a much more appealing proposition.

Porsche vs VW

The bigger picture: Just pretend we’re not here.

Ford’s also well aware of investors’ penchant for EV stocks, which might be why the American carmaker said late last week that it’s looking to separate its EV division from its century-old legacy business. Ford did say it considered listing the division on the stock market, but it’s more likely to turn it into its own segment that’ll report its own separate financial results. That should make it easier for investors to value its EV business, and should push up the valuation of the company as a whole.

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