Market Commentary / Stock Analysis

Investing in Times of Crisis

  • Kevan Matheson

    Prior to starting Edge, Kevan was an Institutional Analyst at RBC Global Asset Management, one of North America’s largest fund managers, with assets under management in excess of $400 billion. After spending the majority of his career focused on large market capitalization public companies, Kevan became attracted to the risk/reward proposition of growth stocks and cryptocurrency. In 2017 Kevan published a book on investing in cryptocurrency, where he speculated on the coming growth in NFT’s and the underlying tokens that power their ecosystems. Known in the growth stock community as Small Cap Kev, his current passion is finding stocks in disruptive industries like blockchain, psychedelic medicine, plant-based meat alternatives & much more. Follow Small Cap Kev & his team on Instagram, TikTok, YouTube & this newsletter. If you like this content, please share it with your friends!

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Hi Everyone,

This newsletter is one that’s truly difficult to write…

The recent event in Ukraine are something I would have never expected to see in this day and age, particularly in a developed economy like Ukraine.

With the proliferation of social media, it’s shocking to receive a first-hand view of what war truly looks like within minutes of scrolling Instagram, Twitter, and TikTok. From babies being evacuated from hospitals and relocated to underground bunkers, to fighter jets and helicopters bombing civilian areas, and soldiers filming TikTok videos while jumping out of airplanes; Russia’s military invasion on Ukraine is at the forefront of the global conscience.

Being half Ukrainian myself, this cuts deeper…

My family immigrated from Ukraine to Canada generations ago, so I no longer have ties, though I can’t help but feel humbled about how fortunate it is to be far away and safe. I could just as easily have been learning how to use an assault rifle for the first time alongside the countless civilians on the front lines right now defending their homes. Instead, I’m typing on a laptop like most around the world watching in awe at what I believed was beyond imaginable in modern society.

I don’t want to use this newsletter to recap everything that’s happened, and continues to endure, as there is more in-depth coverage from media outlets around the world.

However as an investor, in times of uncertainty like this, you can’t help but question how such an intense global event will impact your portfolio.

In this newsletter, we’ll evaluate investor sentiments, review how markets have historically reacted to past wars, discuss the repercussions of economic sanctions on the global economy and look at which assets could be poised to benefit from it all.


Buy the invasion?

Reddit certainly has a reputation for its shit-talking, hyper-aggressive base of retail investors, and this time around is no different. Across various forums (subreddits) on the platform, including /r/superstonk (nope, not a typo), some investors are actually speaking to this conflict in a bullish manner.

With the U.S. inflation rate soaring to a 40-year high of 7.5%, it’s been widely expected that central banks are on the verge of hiking interest rates. The logic discussions in these forums is that

hiking interest rates will do more damage to the markets than the economic impact of the invasion

With much bigger urgent problems to navigate, this cohort of investors believes that central banks will postpone the inevitable rate hikes.

While there’s a lot to consider, at first glance I don’t immediately disagree with their logic.

As you may already know, my primary focus is on small cap growth stocks (and a bit of crypto), which many are squarely focused on selling their products and services within North America. Though many small enterprises will feel the ramifications in some form (rising energy costs as an example), the main impact will likely be from diminished investor appetite for risky investments.

If there is one thing investors hate more than anything it’s uncertainty…

The steady hand of Warren Buffet has (as expected) vocally advocated owning stocks and says even if the conflict escalates to a WWIII scenario he wouldn’t be selling his equities; in fact, he would likely buy more in the event that prices fall.


Investing in times of war

In World War I, the Dow fell more than 30% and markets were closed for 6 months. When they reopened, the Dow rose more than 88% in 1915.

In World War II, the Dow increased 10% on the first day of trading after Hitler invaded Poland. From 1939 until the end of the war in 1945, the Dow increased over 50%.

During the Cuban Missile Crisis in the 13 days of peak tension, the Dow only lost 1.2%, and it gained 10% during the remainder of the year.

On 9/11, stocks tumbled nearly 15% in a matter of days following the terrorist attacks, but within months had regained those losses.

In the Iraq War, stocks gained 2.3% when the U.S. invaded Iraq in 2003, and the markets ended up 30% by the end of the year.

War inherently creates uncertainty and the fear of the unknown, which can have a negative impact on equity prices in the short run. But if history holds any indication of future events, then panic selling appears to be a short-sighted decision.

A post shared by Edge Investments (@edge.investments)

Time to take a rest from the Vodka sodas?

Governments around the world are announcing economic sanctions against Russia as punishment in an effort to interrupt the economic engine fuelling their effort. In addition to official government sanctions, a variety of companies/groups/businesses are imposing their own ‘sanctions’ in an effort to economically hurt Russia, but also in support of Ukraine.

One such sanction announced this week was the elimination of Russian vodka imports into Canada. Others to name a few include Apple pausing all sales of its physical products in Russia, Netflix paused production and acquisitions of Russian projects, fashion brand H&M is suspending sales in Russia, and even EA’s popular video games of FIFA and NHL will exclude the Russian national teams from gameplay according to industry insider Tom Henderson.

Twitter avatar for @_Tom_Henderson_

Tom Henderson @_Tom_Henderson_
In a new company email, EA has said it will be removing Russia from the likes of FIFA and NHL games due to the invasion of Ukraine.

Many of these sanctions are simply ‘cute’ in nature and not overly meaningful. I’m not an economist, but I can confidently say that Russia’s economy does not live or die by the export of vodka into Canada.

Where it would really hurt is in the energy markets.

Russia plays an outsized role in global energy markets as the 3rd largest oil producer. It exports about 5 million barrels of crude/per day amounting to about 12% of the global oil trade. Some 60% goes to Europe and another 20% to China.

The top three oil-producing countries in 2020 (the U.S., Saudi Arabia, and Russia) accounted for 43% of the world’s petroleum liquids production. The top five producers (+Canada and China) accounted for 54% of the global output.

So far, U.S. and European sanctions have not barred oil or gas imports and have included exceptions for transactions to pay for oil and gas. Western leaders are reluctant to restrict Russian oil exports at a time when global energy markets are tight and high prices are fuelling inflation in developed economies. That is, except for Canada of course!

In the short term, the West is caught between a rock and a hard place because any restriction of energy imports would likely send already steep prices even higher.

However, in the long-term, I think this would almost certainly have meaningful implications for the energy sector, namely in renewables. Because of efficiency gains in wind, solar, modular nuclear reactors and many other sources of renewable energy, the economics of local production of energy makes a lot more sense.

I believe that this conflict and the ‘caught with pants down’ nature of Europe’s energy dependence will likely speed up the green transition, and I’m sure that all other net-importing countries are thinking the same way.

In fact, it was just announced that Germany’s Economic Ministry now wants to speed up the passage of the Renewable Energy Sources Act (EEG) through parliament so that it can come into force by July 1st 2022.


What about a SWIFT kick below the belt?

One such sanction that is getting a lot of attention is the removal of Russia from the global payments communication network known as SWIFT (Society for Worldwide Interbank Financial Telecommunication).

SWIFT was founded in 1973 to provide secure messaging for international payments. It is a Belgian member-owned co-operative, with around 11,000 member banks from 200 countries and territories. It provides messaging systems for instructing and then monitoring interbank payments and trade finance, integrated into banks’ processing systems worldwide.

The removal of Russia from SWIFT results in inconvenience and added financial costs for Russia, though it doesn’t appear to be as crippling as sensationalist media likes it to seem. SWIFT at the end of the day is a communication platform, not a payment platform.

SWIFT is supposed to be an unbiased intermediary that doesn’t choose sides, though that has clearly not been the case.

So what do you turn to as a truly independent method for transferring value? Perhaps something that is legitimately decentralized…

Blockchain. Because whether you’re a retail speculator, a drug dealer or a delusional power-hungry dictator, cryptocurrency doesn’t ask any questions.

And right on cue…

Trading volumes between the Russian ruble and bitcoin increased to a nine-month high as the country’s fiat currency plunged to record lows due to the fallout from the invasion of Ukraine.

Twitter avatar for @SmallCapEdge

Edge.Investments @SmallCapEdge
Bitcoin Compared To Fiat Currencies In The World 🌐(by Market Cap): #Bitcoin – 18,971,593 BTC Russian Ruble $RUB – 14,222,192 BTC Saudi Riyal $SAR – 13,921,304 BTC Singapore Dollar $SGD – 12,545,476 BTC Israeli New Shekel $ILS – 12,343,393 BTC

Even if you’re a country or corporation with good intentions and no expectation of being removed from the global financial community, you would likely be wise to have a backup plan simply for the sake of continuity.

Cryptocurrency as we all know is decentralized and governed through software protocols, not by governments. Though elected officials can make transacting in digital currency more inconvenient, they can’t prevent it entirely.

Twitter avatar for @FedorovMykhailo

Mykhailo Fedorov @FedorovMykhailo
I’m asking all major crypto exchanges to block addresses of Russian users. It’s crucial to freeze not only the addresses linked to Russian and Belarusian politicians, but also to sabotage ordinary users.

After a request from Ukraine’s Ministry of Digital Transformation to freeze Russian crypto accounts, a spokesperson from Binance, the world’s largest crypto exchange, said it is

“not going to unilaterally freeze millions of innocent users’ accounts…However, we are taking the steps necessary to ensure we take action against those that have had sanctions levied against them while minimizing impact to innocent users. Should the international community widen those sanctions further, we will apply those aggressively as well”

After the same requests were sent to various exchanges including Coinbase, Huobi, KuCoin, Bybit, Gate.io and Whitebit, along with Ukrainian exchange Kuna, crypto exchange Kraken, CEO Jesse Powell responded that the platform

“cannot freeze the accounts of our Russian clients without a legal requirement to do so.”

Even though this is an incredibly delicate situation for many crypto exchanges, I really do think that this kind of ownership given to users’ accounts does reinforce the long-term outlook for decentralized finance.


How am I positioning my portfolio?

This is a difficult time for me to really provide any hard calls or high conviction stock picks.

I think there is still a lot of chaos to come, which could very likely target the markets in the near term. Any weakness in large-cap equity markets would likely be a buying opportunity for me, but for my small-cap growth stocks…I’ll continue to be very selective.

Metaverse related small-cap stocks continue to strike me as one of the most interesting and exciting sectors to watch this year. The current market’s uncertainty is a near-term negative for such a speculative sector going through it’s hyper-growth phase, but overall my opinion hasn’t changed. Currently, my only exposure is through NFT Technologies (private) and Immutable Holdings (HOLD.NE).

Renewables have been a long-term interest of mine, though admittedly I have zero portfolio exposure. My renewed enthusiasm in the sector, along with certain ancillary benefactors such as the battery metals and uranium markets, seems like an interesting opportunity that I’ll be looking to investigate and expand on once I’m more well-versed. Hopefully, I’ll make sense of the industry and find some new stocks to share!

Decentralized Finance (aka DeFi) remains a long-term no brainer to me, and currently, the only two stocks I have are WonderFi (WNDR.NE) and Immutable Holdings (HOLD.NE). As a note, I am currently an investor in BitBuy, a private crypto trading platform that has agreed to be acquired by WonderFi. So technically I lied, I am not yet a proud shareholder of WNDR.

One stock I remain incredibly bullish on for the long term is Plantable Health (PLBL.NE). Shares are trading ~50% below its IPO in spite of no negative news whatsoever and strong fundamentals. I have been constantly buying anything I can get around $0.20, which was the financing price from last spring.

For my American readers: I have just found out that they have submitted their application to list on the U.S. OTC markets, so hopefully they have an American ticker symbol soon.

With lockdowns subsiding I expect to see a large health and wellness adoption as people look to get back in shape and make health a top priority in their life. Click here to read my long-form article about Plantable.

I’d like to close this newsletter with a moment of gratitude.

For all of us safe and out of harms way, we need to count our blessings and be incredibly grateful to be in this position. I would encourage you to consider donating to help the Ukrainian efforts, even if in a small capacity, because everything helps.

I donated to the Canadian Red Cross, but click the button below for an article that provides ideas on how you can support if you need some inspiration!


This newsletter is written by Kevan Matheson, Founder & CEO of Edge Investments.

Prior to starting Edge, Kevan was an Institutional Analyst at RBC Global Asset Management, one of North America’s largest fund managers, with assets under management in excess of $400 billion.

After spending the majority of his career focused on large market capitalization public companies, Kevan became attracted to the risk/reward proposition of growth stocks and cryptocurrency.

In 2017 Kevan published a book on investing in cryptocurrency, where he speculated on the coming growth in NFT’s and the underlying tokens that power their ecosystems.

Known in the growth stock community as Small Cap Kev, his current passion is finding stocks in disruptive industries like blockchain, psychedelic medicine, plant-based meat alternatives & much more.

Follow Small Cap Kev & his team on Instagram, TikTok, YouTube, and LinkedIn.

 

 

 

Disclosure/Disclaimer:
We are not brokers, investment, or financial advisers; you should not rely on the information herein as investment advice. If you are seeking personalized investment advice, please contact a qualified and registered broker, investment adviser, or financial adviser. You should not make any investment decisions based on our communications. Our stock profiles are intended to highlight certain companies for YOUR further investigation; they are NOT recommendations. The securities issued by the companies we profile should be considered high risk and, if you do invest, you may lose your entire investment. Please do your own research before investing, including reading the companies’ public filings, press releases, and risk disclosures. The company provided information in this profile, extracted from public filings, company websites, and other publicly available sources. We believe the sources and information are accurate and reliable but we cannot guarantee it. The commentary and opinions in this article are our own, so please do your own research.
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