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Throughout our 22 year history, tragic events at home and abroad have periodically made writing our financial commentaries very difficult. Whether the attacks of 9/11, the humanitarian crises in Syria and Afghanistan, or the early suffering wrought by the covid-19 virus, such episodes leave us hesitant to expound on investment and wealth stewardship, aware that such topics can seem comparatively trivial and indulgent against circumstances elsewhere. The war and consequent human toll in Ukraine falls squarely into this category and so we accompany our work this month with thoughts for the men, women, and children presently caught in the eye of this unthinkable maelstrom, and also for the friends and families of the DM staff members who hail from areas uncomfortably close to harm’s way.

As we identify and evaluate the potential economic implications of unfolding conditions, some of the questions discussed by our investment committee in recent days include:

· Energy — not surprisingly, removing the world’s largest natural gas and second largest oil exporter from the market has had an immediate impact on prices. How long will this supply deficit last and how will the world cope over time? Will the west’s attitudes and policies toward energy production soften, or will demand eventually be suppressed by sustained higher prices? Will this backdrop accelerate the push toward renewable energy sources and could it spur renewed interest in nuclear power generation?

· Inflation — of course, energy costs contribute to the price of many other items in our economy. How badly will the backdrop described above exacerbate the general inflation we’re now experiencing? How likely is this source of price pressure to be stemmed by the monetary measures expected from central bankers?

· Interest rates — speaking of monetary measures, it was widely predicted that the US Federal Reserve would boost policy rates by 50 basis points at its meeting later this month and follow with as many as five additional hikes through the balance of the year. In a climate of extreme geopolitical uncertainty, however, is this forecast still valid? Could the rise in fuel prices act as a tax on consumers and take care of some of the Fed’s work for it? Since the Russian offensive began, the yield on the 10-year US Treasury bond has fallen from more than 2% to as low as 1.7%, a decline which few would have predicted just days ago.

· Globalization — one of the few positive developments flowing from recent events has been a sudden ascent in global unity and cooperation. Could this resurgent spirit help to reverse the decline in global trade that has occurred over the past decade? (see first chart below)

· Government spending — since the 1960s, military expenditure as a portion of the global economy has been steadily decreasing (2nd chart). Will recent developments cause governments to alter the composition of spending? Has the ‘peace dividend’ enjoyed since the end of the Cold War now been exhausted?

With Q4-21 earnings reports now largely complete, our team has been able to re-underwrite each of DM’s equity positions, with the conclusion being that our core portfolios have rarely looked as attractive from an expected return perspective as they do now. In the weeks ahead, we’ll weigh this bottom-up analysis against macro factors such as those listed above to optimize the risk-reward position of each of our mandates.


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