Russia’s economy is relatively small, about the size of Spain, and Ukraine is even smaller. They are not large purchasers of U.S. companies' good and services and thus we believe the impact will be small for some companies and nonexistent for most. We examined potential impacts to our portfolio companies some time ago and determined the effect would be minimal.
We believe the secondary impacts from any sanctions could have a more lasting effect. Russia is a large supplier of commodities, such as oil and gas, wheat, iron, and aluminum. We believe that if these were sanctioned or cut off by Russia, the effect would be felt in nearly every aspect of the U.S. economy. For example, Russia supplies about 5-10% of the U.S. oil. We have already seen a spike in oil prices from $77 per barrel on January 1, 2022, to $100 today, which will have an impact on nearly every company in the form of higher input costs as well as added costs to the consumer. Increased energy costs will likely further fuel inflation and could limit consumer spending. We believe this dynamic will impact large durable purchases most prominently, with minimal impact on lower cost discretionary products and staples.
A broader risk is what these higher costs will do to Europe’s economy, which is much more reliant on Russia for certain commodities. The risk that Europe’s consumer gets further stretched could have an impact on U.S. corporate earnings. The extent of this will likely depend on how long the conflict drags on.
We will continue to monitor consumer spending and the potential for any impact on our portfolio companies as events unfold, however, we are currently comfortable with our positioning in companies with recurring revenue and less exposure to macro and geopolitical issues.
Important Disclosures
This communication is prepared and distributed by AMI Asset Management (AMI), an SEC-registered investment adviser (registration does not imply a certain level of skill or training).The information contained herein and the opinions expressed are those of AMI as of the date of writing, prepared solely for general informational and discussion purposes. The information contained in this communication has been compiled by AMI from sources believed to be reliable; however, AMI does not make any representation as to their accuracy, completeness or correctness and does not accept liability for any loss arising from the use hereof. Such information and opinions are subject to change without notice due to changes in market or economic conditions and may not necessarily come to pass. References to specific securities are not intended as recommendations of said securities. The reader should not assume that any investments in securities, sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. Past performance is not a guide to future performance and future returns are not guaranteed.