Investability bulletin 21/02/22: An ill wind

Why Russia holds the whip hand in Ukrainian diplomacy, and mixed news from the health sector

Photo by Mufid Majnun

Tree surgeons and repair crews are in a for a busy week after Friday’s storm – we lost three trees on the farm, bad news on the landscape gardening front but at least we’ll have plenty more wood to keep the heating bills down. And my power and internet survived, which meant I could hunker down and crack on with the latest Investability Weekly

One thing that isn’t helping to keep the bills down are the antics on the Ukrainian border, where it’s still as clear as mud whether Russia plans an invasion or not, or even whether a meeting between Vladimir Putin and Joe Biden to find a diplomatic solution will take place.

As I wrote some time ago, I think Russia holds the whip hand here mainly because Europe is so dependent on its gas. The EU imports more than half of its energy, and nearly two-fifths of the gas it needs comes through pipelines that run from Russia through the Ukraine, the so-called Brotherhood Network. A 25% drop in Russian gas supplies last year is one reason for the soaring gas prices that are causing so much inflationary pain right now – as some observers put it last year, Putin is “weaponizing gas” to put pressure on the EU to sign off a new direct pipeline to Germany, Nord Stream 2. There’s lots of talk of Europe needing to diversify its energy supplies, but there isn’t a lot of spare capacity from elsewhere, not least from the LNG complex, and Putin knows it.

The continuing uncertainty saw the FTSE 100 losing altitude throughout the day, with Russian-linked stocks Polymetal and Evraz leading the market lower, but lots of quality names are also down suggesting inflation fears remain at the forefront of investors’ minds – valuation concerns are really starting to weigh on the most highly rated shares as gilt yields rise in response to central bank plans to tackle inflation. JPMorgan has completed a complete U-turn and now thinks there could be nine consecutive 25 basis point increases on the way after January’s hot inflation reading.

That said, very little has escaped the bears’ interest today, including my own value-led portfolio. It’s still up so far this year, just, so is doing what I want it to and preserving value…so far. I added a new position this morning, Somero Enterprises, whose shares are surprisingly cheap for a fast-growing company, and trading at a discount to comparable cyclicals like Ashtead. I can only think investors are worried about a potential commercial property slowdown, but the lowly valuation reflects that risk. You can read my thoughts on the company here.  

Elsewhere, the government looks set to dump the remaining Covid restrictions at some point later today after a delayed cabinet meeting. That also means an end to free testing after number 11 refused to hand over any extra cash to keep it going – good news for the taxpayer but bad news for the testing groups I wrote about last week. Abingdon Health’s shares are down 14% as I write, although that’ fairly pain free in contrast to Synairgen, whose shares lost 85% after its SNG001 covid treatment failed a trial.

In contrast, AstraZeneca topped the main board, up 3.5% after successful phase 3 trials of its breast cancer drug Enhurtu – it’s genuinely huge news that could help slash the 685,000 breast cancer deaths a year, and is a massive validation of AZ’s oncology strategy. It just goes to show that bigger is often better in the drug-discovery space.

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