Investing Amidst the Russia/Ukraine Conflict
By: Wayne Yi, CFA
Equity markets have entered into correction this week with the S&P 500 falling over 11% year-to-date. This is being driven by two main factors: inflation and the anticipated Fed response of a more aggressive rate-hiking and balance sheet reduction program, and more recently the intensifying conflict between Russia and Ukraine that has turned into an invasion last night. We expect markets to further sell-off on this news today as the volatility index has spiked to 37, the highest in over a year.
The US and our NATO allies have staunchly opposed the anticipated invasion and we can expect forceful economic sanctions against Russia. However military engagement would likely be very limited to avoid unanticipated escalation of war beyond Ukraine. Nonetheless, there is uncertainty here and thus natural nervousness around the situation.
As we have written in the past, wars have been positive catalysts to stocks (excluding the very important negative mortal impact), while negative for bonds. This is because the initial market sell-offs create attractive entry points for investors, and the government tends to be stimulative through military spending and a more dovish monetary posture to mitigate negative economic impacts brought on by conflict. These elements tend to be negative for bonds as they tend to be inflationary. The wrinkle this time around is the Fed is trying to curtail inflation, rather than spur it. On the margin, we believe the Fed will still look to methodically raise rates throughout this year, but depending on the duration and magnitude of the Russia-Ukraine conflict, may be slower than the markets initially anticipated.
Despite the current military and economic uncertainty, we are incremental buyers of equities. Corporate fundamentals continue to remain strong and should be resilient to any near-term pressures. We view stocks as the only real way to outpace inflation and grow wealth for the long-term. Given the current global backdrop, we would buy domestic large-cap index exposure as a balanced measure of business quality and valuation. Russia is a somewhat small component of emerging market ETFs, but the sector may trade weaker on negative sentiment, and thus we would limit our exposure here. While we remain “target-weight” equities, further stock selling pressure would likely move us towards a more aggressive buying stance.
Finally, fixed income shows its value in times of uncertainty. 10-year Treasuries have fallen from a yield of slightly over 2% to about 1.85% over the past week as there has been a flight to safe-haven assets. Furthermore, a slower-moving Fed would be positive to bonds. While we remain underweight the asset class, we do think it is important to maintain some high-quality duration exposure to serve as dry powder in periods such as this.
Markets can be volatile over short periods of uncertainty however we look towards long-term fundamentals and business resilience as our driving thesis to be buyers at attractive valuations when others are fearful. If you would like to discuss this further, please reach out to your client advisor.
About Wayne Yi, CFA
Wayne Yi is the Head of Investments and member of the Investment Committee for Simon Quick Advisors. He leads the firm effort on all market research and manager diligence across traditional equity and fixed income strategies as well as in alternatives, including hedge funds and private equity allocations. Prior to joining the firm, Wayne was a Co-Portfolio Manager and member of the Investment Committee for SAIL Advisors, a hedge fund investment firm headquartered in Hong Kong. He also served as the senior analyst for their Credit and Event-Driven strategies. Prior to SAIL, Wayne was the Sector Head for Credit and Event-Driven strategies at Robeco-Sage, a hedge fund investment firm based in New York. Wayne started his career in investing at Delaware Investments as a Research Analyst for high yield and investment-grade bonds across various industries. He then joined Goldman Sachs’ Investment Research department where he was the Senior Analyst covering high yield bonds in the Technology sector. Wayne is a graduate of the University of Pennsylvania where he received a B.A. in Economics and in International Relations. Wayne is a CFA charterholder. To learn more about Wayne, connect with him on LinkedIn.
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