Our Director of Trading, Trent Primmer, was recently live on ausbiz discussing how the current geopolitical tensions between Russia and Ukraine are guiding his investment decisions, presented by a very hard market to navigate.

Prepare for the dead-cat-bounce

Trent believes the Ukraine/Russia conflict will be relatively short-lived if a deal and peace agreement is signed between the two countries, returning markets to how they were pre-conflict.

He suggests using the current market rallies to start selling out some higher-risk positions and trimming portfolios and exposure to small-caps. He ultimately expects to see a retracement in the oil price and falls in markets, as the markets were falling pre-conflict. This will more than likely be preceded by a dead cat bounce followed by further corrections and choppy market conditions. As far as portfolio positioning, Trent says we should be in commodities such as oil and energy, graphite, nickel and rare earths.

Read the conversation:

Andrew Geoghegan:

“Okay, so we're going to continue with that market analysis now given what's happening. It's all pretty dynamic as you'd expect. Trent Primmer now joining us from Barclay Pearce Capital, who’s going to take us through what he's watching. Trent, good to see you.” 

Trent Primmer:

“Good to see you. Thanks for having me.”

Andrew Geoghegan:

“So, let's look most immediately at what has just happened over the past 24 hours. What's your view of what's playing out and how that's informing your investment decisions?”

Trent Primmer: 

“Our view of the Ukraine-Russia conflict has been that it’ll be relatively short-lived and whether that might be days or weeks that it eventually peters out and there's an agreement from both sides.

I think the most recent developments are that, and this is from the aid of the Ukrainian president, Volodymyr Zelensky is that he's agreed in principle to three out of the four demands from President Putin in Russia. Whether they can sign sort of a peace agreement over the next couple of days or whether it lasts a few weeks, I mean that's anyone's guess. Positioning our portfolios, I think what we'll see is markets.

If there is a deal signed, an agreement signed, is that markets will sort of return to how they were previously pre conflict, which is quite choppy markets and sell offs, but that'll be preceded by a dead cat bounce and renewed optimism, renewed buying optimism from investors in the market.

I think that's probably a good opportunity to start trimming off some high risk positions. I think we'll see retracements in the oil price naturally because it's run quite high short-term and hopefully sit above the a hundred US a barrel mark. More than likely, and it doesn't make sense to me, but probably shorter term sell offs in gold. It should be much higher than where it's at now, but we're just not seeing that. So that's our view at the moment.” 

Nadine Blayney:

“So do you think that the big rally that we saw on Wall Street in Europe last night could be the start of that sort of relief rally?”

Trent Primmer:

“I do. Yeah.”

Nadine Blayney:

“So you’d be trimming now?”

Trent Primmer:

“For sure, yeah. We could see down days if talks and negotiations deteriorate. It's just a very hard market to navigate. I think any big rallies in the market right now, before something signed is probably, it's very optimistic. So, you use those rallies to start selling out some of your higher risk positions and trimming your portfolios. Fortunately, we've sat in sort of 34-40% cash, which has carried us far, but it would have been nice to have some more oil exposure.” 

Andrew Geoghegan:

“That's a pretty high percentage of cash you're holding right there, but obviously maybe saving that, obviously to see some opportunity. In terms of those high risk assets you're talking about, what are you actually trimming yourself at the moment then?”

Trent Primmer:

“Some of our iron ore positions that have run quite high, I'd consider those relatively high risk at the moment. It all comes down to how much you're allocating to these names, right? When you've got the renewables, the mining resources sector and commodity sectors in general, that you're aiming for, it's a lot of exposure to have, sort of 50-60% of your portfolio into those names. I wouldn't necessarily call them high risk, but we have a lot of funds in those names. It's carried us far. We don't want to be too greedy. We want to take the right approach and protect the gains that we've made. So it'd be trimming off those positions and particularly in the small cap space as well. Trimming small cap exposure in particular.” 

Nadine Blayney:

“Why trimming small cap exposure? Small caps are outperforming in the US.”

Trent Primmer:

“Yeah, exactly. But from our perspective, we've held quite a bit in those names as well. So there's a lot of risk on the table for us and managing those positions can be a bit of a nightmare. I mean, you saw the sell off in sort of Nickel Mines as well. More recently, I think positioning into some like Woodside, Santos, these positions are things that we’ll hold, but will reduce some exposure because we'd see probably short term sell offs in the whole broader market as well, including the small cap space.”

Andrew Geoghegan:

“Given you are holding 30 to 40% cash, what's the trigger point as when you do start buying and where?” 

Trent Primmer:

“Yeah, good question. It's difficult. It all depends what happens in the markets, right? Cause you want a return on that cash. With rate rises coming through, we'd look at US earnings exposed companies that are domestic Aussie businesses and we spoke about this last time on the show. Some of the Aussie banks when markets are stable, net interest margins are going to be looking a lot healthier as rates start to rise, but you want a good read through of what's going to happen when you raise those rates. How healthy are the loan books of the banks, are there any delinquency rates on the rise? Did people take a lot of debt out in a low interest rate environment and how would they service that with interest rate rises coming through?

So these are all factors that we look at before we enter into relatively large positions in some of those names. My view is commodities will still be where you want to park your money. Long-term, our investment thesis hasn't changed. That's what we want to invest in that market, particularly in a high inflation environment when these businesses can pass on cost to their customers. We're obviously looking at short-term falls more than likely coming through in the market and we want to mitigate that as much as possible.”

Watch the full video here.

This interview was arranged by Hans Lee, producer and journalist at ausbiz.

Barclay Pearce Capital team members are often featured by the media, sharing their insights on the market. Receive the latest market summaries and market-moving news, subscribe to Deal of the Week