Investment Management –
Market Flash - 24th February 2022
Welcome to Market Flash – a communication designed to give you time-sensitive information regarding the material events that impact the markets.
After a significant spike in geopolitical risk overnight, we share our thoughts on markets and a read-through from a portfolio perspective in this Market Flash:
Many investment professionals managing capital today have not navigated a meaningful military conflict in their careers, assuming one excludes the Middle East. It was a similar situation in March 2020 during the pandemic, when many fund managers had never experienced a circa -30% drawdown in equity markets. This is simply because most of them began their careers after the Global Financial Crisis of 2008-2009.
It is worth highlighting there are a few real differences between today and March 2020. When the pandemic hit about two years ago, governments were aggressive and launched coordinated monetary policy actions across all the major central banks in an attempt to ease financial conditions via rate cuts and bond buying. This was then reinforced by seemingly unlimited fiscal spending in the form of direct payments and general support for businesses. This fiscal monetary one-two punch was extremely effective, and one can easily make the case that this support ensured the sell-off in March 2020 was short-lived.
But this time we are operating against a more challenging backdrop, namely an environment of rising rates, the withdrawal of bond buying, rising inflation, and spiking energy prices. This is also complicated by the fact that we haven’t witnessed a serious military conflict in Europe for nearly eight decades – and no playbook exists from which to draw parallels. Some commentators are using Iraq, but I am not sure that is a fair comparison.
At the time of the writing of this note, (Thursday midday), we have European equity indices offsides by between 3%-5%, oil higher by circa 8%, the VIX (volatility index) higher by 20% and the NASDAQ futures down by 3%. Now that the Kremlin has escalated the conflict with Ukraine, developed government bonds have caught a ‘flight to safety bid’ and look to rally as the USD and Yen inch higher (classic safe haven currencies).
But I would argue that it is more important to focus on the potential impacts to monetary policy and especially to the March Federal Reserve meeting during which it is expected that the US central bank will announce hawkish measures to help address higher than normal inflation in the US. Is that narrative now off the table? I would go one step further and say it now appears global hawkishness has taken a back seat to Vladimir Putin.
As an Investment Committee, we were hoping for a ‘COVID re-opening rally’ in the first half as we took off our masks and headed back to the office. These hopes appear to have been dashed by the geopolitical escalation over the past 24 hours. From a portfolio perspective, thankfully we do have thematic allocations to energy and commodities which is helping to partly offset declines in broad equity indices and corporate bonds, although not by enough. At our recent quarterly Investment Committee meeting, we did indeed increase our cash holdings and rotated a modest amount of capital into the absolute return bucket. This should help. Therefore, we are in a fortunate position where we can draw upon some firepower and buy on weakness in the future. But as an old hand, having witnessed many market selloffs in my career, I suspect that our Committee will err on the side of caution for the time being as we watch the conflict evolve and then take action when we believe the valuations are compelling.
As always, we invite your thoughts/questions and would encourage you to contact your representative so that we can respond promptly.
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