The Art of War

Wars should be avoided at all cost.

As we approach the first anniversary of the start of the Ukrainian conflict, we have learnt that modern warfare has evolved. Hybrid warfare does not involve actual traditional physical attacks with someone opening fire with a weapon. Hybrid refers to the use of non-conventional methods, that are non-attributable acts, which are often no less dangerous.

Hybrid warfare is designed to exploit national vulnerabilities across the political, military, economic, social and informational as well as infrastructure. This could range from mysterious underwater explosions, such as suffered by the Nord Stream gas pipeline in 2022, to a cyber-attack like that experienced by Estonia in 2007. It can also include subtle online campaigns to undermine western democracies such as the concerted Russian influence in the 2016 US elections.

The European Centre of Excellence for Countering Hybrid Threats evaluates potential hybrid warfare threats to information services and critical infrastructure. A team of 40 analysts from NATO and EU countries, including the UK MoD is constantly on the alert for new dangers. They are currently concerned by ‘campaigns of disinformation.’ This involves the deliberate propagating of an alternative, false narrative, often one that appeals to certain more receptive sections of a population. This phenomenon has accelerated since Russia’s invasion of Ukraine, with millions of citizens- not just in Russia, but even in Europe – accepting the Kremlin’s line that the invasion was a necessary act of self-defence. In Slovakia, more than 30% of those polled believed the Ukraine war was deliberately provoked by the West.

The UK needs to invest to counter hybrid warfare threats. However, this comes at a time when government spending is under pressure and our armed forces are using outdated equipment and are ‘overstretched’. The UK is the only major military power in NATO not to increase its spending as a result of the Ukrainian conflict.  There are concerns within NATO that the UK does not have sufficient resources to take over leadership of NATO’s rapid-reaction force from Germany at the end of 2023.

Defence Secretary Ben Wallace is reported to be pressing Chancellor Jeremy Hunt to increase the defence budget by between £8bn-£11bn over the next two-years. Can he find the extra money?

 

What have we been watching?

 

A quieter half-term week for trading activity but an important one with January inflation data. US inflation didn’t cool quite as much as expected and the rather stubborn price increases in services suggest that hopes of a Fed pivot in 2023 may still be a little premature. By comparison, a slightly bigger drop than expected in UK inflation prompted a re-basing of Bank of England interest rate expectations. This led to a fall in Sterling to $1.20 which helped push the value of the UK’s top 100 companies many of which are dollar-earners, above the 8,000 level for the first time.  

Putin’s fresh and long-anticipated offensive in Ukraine has already begun, according to NATO chief Jens Stoltenberg. ‘We see how they are sending more troops, more weapons, more capabilities.’ He also said that the war has become a race of logistics -with both Russia and Ukraine facing challenges to keep supplies of ammunition and weapons flowing to the frontline. Russia is estimated to be currently firing 20,000 shells a day compared with 5,000 from Ukraine. Ukraine’s current rate of ammunition expenditure is many times the rates of production within NATO member states. NATO members also need to replenish their own limited stockpiles. The US says China is considering supplying weapons and ammunition to Russia – a claim strongly denied by Beijing. Meanwhile, Moldova’s president Maia Sandu has accused Russia of plotting to use foreign ‘saboteurs’ to overthrow the country’s pro-EU government.

---

 

UK inflation came in below expectation. January CPI was -0.6% and year-on-year fell to 10.1%, but the most pleasant surprise appeared to be the core reading which dropped by 0.9% to an annualised rate of 5.8%. This is an especially important lead indicator for wage growth. However, some elements of inflation are still proving ‘sticky’ namely rent and food prices. Last week, McDonalds announced it was increasing prices by up to 20%. The next Bank of England meeting is March 22nd and market futures are indicating UK interest rates peak at around 4.5% compared with 4% currently.

---

 

In Europe, Christine Lagarde, president of the European Central Bank re-iterated that the central bank intends to increase interest rates by 0.5% next month but ‘after that, we will then evaluate the subsequent path of our monetary policy.’

---

 

In the US, annualised consumer price inflation (CPI) cooled for a seventh month in a row. CPI eased slightly in January but not quite as much as had been hoped, to 6.4%. Shelter costs, a large part of which is rent, was the largest contributor and more significantly, prices for services aren’t slowing further due to increasing wages. Core inflation dipped very slightly to 5.6%. Federal Reserve (Fed) officials who spoke following the release of the inflation data asserted that interest rates will remain elevated for an extended period in order to mitigate the threat of persistent price pressures. US interest rate futures have edged up slightly to 5.25% ahead of the next meeting of the Fed on March 22nd. Meanwhile, PPI (producer price inflation) was a bit higher than expected at an annualised 5.4% and appeared to be distorted by weather effects, particularly some energy components. US retail sales in January were also stronger than expected, aided by new car sales.

---

 

Japan narrowly avoided recession in the fourth quarter of 2022 but the annualised growth rate at 0.6% was well below market expectations as business investment contracted. Kazuo Ueda is the Bank of Japan’s (BoJ) new governor and a surprise appointment after the outgoing governor’s deputy reportedly turned down the job. He is under pressure to join other central banks in tightening, while avoiding panic by suddenly unwinding the BoJ’s longstanding ultra-loose policies.

---

 

 

OPEC confirmed that oil demand exceeded pre-pandemic levels in 2022 but Brent oil moved a little easier at $83 on the US inflation data.

---

Finally, the UK has some of Europe’s biggest liquified natural gas handling capacity. However, the government’s top adviser on energy infrastructure has accused it of taking a ‘big gamble’ on energy prices easing after failing to reach an agreement to increase the UK’s gas storage capacity in time for next winter. While the UK needs to increase its use of renewables, gas storage will be required to ‘boost our resilience.’

Read Last Week’s Alpha Bites – You reap what you sow

 

Further information about Alpha Portfolio Management, our products and services, please visit www.alpha-pm.co.uk or email info@alpha-pm.co.uk. Alternatively, you can call us on 0117 203 3460.

This publication is for informational purposes only and should not be relied upon. The opinions expressed here represent analysis by an Alpha Portfolio Management representative at the time of preparation and should not be interpreted as investment advice.

You should seek professional advice before making any investment decisions. The past is not necessarily a guide to future performance. The value of shares and the income from them can fall as well as rise and investors may get back less than they originally invested. The sender does not accept legal responsibility for any errors or omissions, in the context of this message, which arise as a result of internet transmission or as a result of changes made to this document after it was sent.

Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the FCA.
Registered Office: 1 The Square, Temple Quay, Bristol, BS1 6DG. Registered in England No. 2489639
Copyright © 2021 Alpha Portfolio Management, All rights reserved

Trading name text

Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.