Ukraine Market Report — Q4 2021
A record export year closing against rising security risk premia. Financial markets priced the risk from November onward while the real economy continued operating normally.
Overview
The year closed with record agricultural export volumes and values, strong metals earnings, high inflation and a rising security risk premium in financial markets from November.
The divergence between markets and operations
This quarter is instructive because two things happened simultaneously and did not converge.
In financial markets: sovereign bond spreads widened, the currency came under pressure, portfolio investors reduced exposure, and insurance costs rose. Markets were pricing a security risk from November onward.
In the real economy: the harvest was shipped, factories ran, contracts were performed, and firms planned for the following year in the ordinary way.
That divergence is not irrational on either side. Financial markets price probability-weighted outcomes and can reprice in a day. Operating businesses respond to what is actually happening in front of them, and reorganising an operation on a probability is expensive.
What it means practically is that a company relying on market indicators to time its operational decisions would have acted before the operational situation changed, and a company relying only on operational conditions would have acted after. Neither is straightforwardly correct.
The measures that were worth taking in this quarter were the ones cheap enough to be worth taking on a moderate probability: reviewing contractual force majeure positions, confirming insurance cover, identifying alternative logistics routes, and knowing where staff and critical records were.
None of that disrupts an operation. All of it saves weeks if the probability resolves the wrong way.
Macro position
Growth for the year. High inflation. Currency under pressure late in the quarter. Reserves adequate.
Sectors
Agriculture — a record year on volume and value.
Metals — a strong year on global prices.
Chemicals — constrained by gas costs.
IT services — continued growth.
What the quarter settled
That preparation which is cheap under normal conditions has an option value that is only visible afterwards — and that the interval available for it is usually short and never announced.
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