Investability bulletin 22/02/22: Sanction stations

Western leaders respond to Russia’s latest move, while investors are spooked by Hargreaves Lansdown’s investment plans

bombastic speech by President Putin citing a plethora of historic grievances against Russia put to rest any doubts as to what his intentions in eastern Ukraine may be. And in recognising the eastern regions of Ukraine, Donetsk and Luhansk, as independent states has essentially begun the invasion – even if Western leaders seem reluctant to acknowledge as much.

What comes next? Sanctions for a start, the first of which is Germany’s decision to postpone the ratification of the Nord Stream 2 gas pipeline which directly connects Russia and Germany under the Baltic Sea. It was completed in September at a cost of $10bn, jointly built by Gazprom, Shell, and France’s Engie, but there’s been major opposition to switching it on from some Western governments – notably the US – over fears that it would give Russia even more of a stranglehold over European energy markets.

But with gas in short supply, it’s a messy situation that western politicians calling for more sanctions need to acknowledge – extensive punitive measures will hurt Russia financially, but they’ll hurt Western economies, too. And remember, Russia isn’t just an energy superpower, but also the world’s largest exporter of wheat and many mined commodities – wheat prices have doubled in the last year and rose again today, like oil and gas trading close to multi-year highs and indicative that inflationary pressures remain. Hardly surprising that the sanctions announced by the Prime Minister this lunchtime involved just five Russian banks and three individuals – narrow to say the least.

Speaking of banks, the latest figures from HSBC – more dependent on China than Russia and hardly a beacon of virtue itself – showed a sharp jump in profit as the global economic recovery gathered pace and the impact of the pandemic proved more muted than it had previously expected. Anticipated credit losses were less than it had feared, but it did take a $450m hit on its Chinese property exposure and marginally missed analysts’ forecasts. And an extra $1bn of share buybacks wasn’t enough to tempt investors even if, as the bank points out, rising interest rates will give it a tailwind this year.  

One business desperately in need of its own tailwind is Hargreaves Lansdown, whose shares slumped 15% on its latest results to the lowest level since 2016. It’s still growing its customer base and assets under management, but slower than analysts had expected. And investors took fright at its plans to spend £175m over the next five years shoring up its business against growing competitive threats.

Its aim is to grow its customer base by 50% by 2026 by adding new funds and advice services, but the plans mean profitability – and the special dividend – will be sacrificed in the interim. The shares are now trading on a forecast PE of 24, lower still than when we ran the slide rule over the business in October, but it’s going to be a while before we see any net benefits from the investment programme, which means there seems to be little supporting the share price right now – the moat has been breached.

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