Perspectivas
Russia – Ukraine: Risk and Investment Implications
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marzo 04, 2022
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Russia – Ukraine: Risk and Investment Implications
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marzo 04, 2022
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Russia – Ukraine: Risk and Investment Implications
Russia – Ukraine: Risk and Investment Implications |
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February was marked by the escalating tensions and a full-scale Russian invasion of Ukraine. Many asset classes were already on a downward trend since the beginning of 2022, given inflation pressures, concerns over rate hikes and deterioration in investor sentiment. However, as the situation between Russia and Ukraine rapidly worsened over February, asset classes that had already sold off, such as the major developed equity regions, sold off further, with the S&P 500 moving deeper into correction territory, while the Nasdaq moved closer to a bear market.
The S&P 500 (USD), MSCI Europe Index (EUR) and MSCI Emerging Market Index (USD) declined around 3.0% over the month, with the MSCI Japan (JPY) faring slightly better, down 1.1%1. Unsurprisingly, Russia was hardest hit, with the MOEX Russia Index (RUB) plummeting 30.0%1. At the same time, the price of crude oil rose to levels not seen since 2014, due to heightened concerns over disruptions to global energy supplies. The VIX2 ended the month at 303, as the conflict intensified, and international sanctions tightened around Russia.
Implications on inflation and monetary policy
In our team’s recent market outlooks, we have highlighted our view that inflation is not transitory, but is likely to persist, at least through the first half of 2022. A prolonged conflict would keep upward pressure on energy prices, and in turn contribute to upward pressure on inflation. However, there is likely to be a notable difference between Europe and the US in this respect, given that Europe is highly reliant on imports of Russian gas, but currently has low inventories. Our view of the impact of this crisis on inflation – and any implications for our portfolio positioning - is therefore one area of active discussion within the GBaR team. The impact of the crisis on global growth and on monetary policy are other areas of focus.
Investment Implications
We entered 2022 already cautiously positioned. At the time, we were talking of Russia/Ukraine tensions as a potential near-term risk and we were therefore monitoring the situation closely, but they were by no means the only risk. For example, during January, increasing evidence of US Fed hawkishness, inflation becoming embedded, concerns over decelerating growth, and deteriorating investor sentiment, were equally important in driving our forward-looking volatility expectations. This was in an environment in which certain areas of the equity market, such as US equity stocks and large tech names, still appeared overvalued.
Our view is that the military conflict in the Ukraine is unlikely to end quickly; the situation is likely to worsen, before it improves. We therefore expect volatility to persist in the short term, so remain cautious in our positioning, in fact we felt it prudent to further reduce exposure to risk assets. Considering the above, we reduced equities further in February, from a level that already reflected caution. We believe that in the near term, this should position us well to weather the near-term market volatility. In addition, we remain underweight duration, given rising yields. We also made the following tactical changes:
Broad Global Commodities
At the beginning of February, we added an overweight exposure to broad global commodities, as an explicit hedge against an escalation in Russia-Ukraine tensions. Given ongoing signs of supply constraints within the commodity complex, we believe the downside risks to this trade are limited. We increased this position towards the end of February given our concerns at the speed with which the situation was deteriorating, and the increased likelihood of a full-scale invasion, such as we now have seen.
European Banks
At the beginning of the month, we reduced exposure to US Financials, in favour of their European counterparts. At the time our view was that European banks may benefit more from rising net interest income on higher rates, and may deliver higher capital returns, than their US counterparts. Since then, the Russian invasion of Ukraine has changed the dynamics, requiring a review of the position towards the end of the month.
UK Equities
We moved overweight UK equities, expressed through the FTSE 100, providing a blend of value and defensiveness through exposure to energy, materials, and consumer staples companies. We believe that an attractive valuation discount and lower (real) rate sensitivity, adds to the defensive character of the FTSE 100 in the current environment.
Active US Growth
For portfolios which allow active funds, we trimmed the US growth active managers, in favour of broader S&P 500 exposure, to achieve a small underweight in large and mega-cap growth stocks. With slowing growth, near-term inflation pressures, and rising nominal and real rates, we expect to see continued pressure on US mega-cap names, which still trade at substantial 12-month forward PE premiums to the broader market.
Tactical positioning
We have provided our tactical views below:
Source: MSIM GBaR team, as of 28 February 2022. For informational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The tactical views expressed above are a broad reflection of our team’s views and implementations, expressed for client communication purposes. The information herein does not contend to address the financial objectives, situation, or specific needs of any individual investor.
Source: MSIM GBaR team, as of 28 February 2022. For informational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The tactical views expressed above are a broad reflection of our team’s views and implementations, expressed for client communication purposes. The information herein does not contend to address the financial objectives, situation, or specific needs of any individual investor.
RISK CONSIDERATIONS
There is no assurance that the Strategy will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and that the value of portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this portfolio. Please be aware that this strategy may be subject to certain additional risks. There is the risk that the Adviser’s asset allocation methodology and assumptions regarding the Underlying Portfolios may be incorrect in light of actual market conditions and the Portfolio may not achieve its investment objective. Share prices also tend to be volatile and there is a significant possibility of loss. The portfolio’s investments in commodity-linked notes involve substantial risks, including risk of loss of a significant portion of their principal value. In addition to commodity risk, they may be subject to additional special risks, such as risk of loss of interest and principal, lack of secondary market and risk of greater volatility, that do not affect traditional equity and debt securities. Currency fluctuations could erase investment gains or add to investment losses. Fixed-income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. In a declining interest-rate environment, the portfolio may generate less income. Longer-term securities may be more sensitive to interest rate changes. Equity and foreign securities are generally more volatile than fixed income securities and are subject to currency, political, economic and market risks. Equity values fluctuate in response to activities specific to a company. Stocks of small-capitalization companies carry special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed markets. Exchange traded funds (ETFs) shares have many of the same risks as direct investments in common stocks or bonds and their market value will fluctuate as the value of the underlying index does. By investing in exchange traded funds ETFs and other Investment Funds, the portfolio absorbs both its own expenses and those of the ETFs and Investment Funds it invests in. Supply and demand for ETFs and Investment Funds may not be correlated to that of the underlying securities. Derivative instruments can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on the portfolio’s performance. A currency forward is a hedging tool that does not involve any upfront payment. The use of leverage may increase volatility in the Portfolio.
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Managing Director
Global Balanced Risk Control Team
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Managing Director
Global Balanced Risk Control Team
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