Focusing on dynamic risk management

Global stock and bond markets slumped in February as the Russian invasion of Ukraine rattled markets, creating the prospect of a global commodity shock as Western nations moved to sanction Russia, among the world’s largest exporters of energy, grains and industrial metals.

The prospect of an additional supply shock beyond the pandemic related shocks the global economy was already experiencing creates the potential for more sustained headline inflationary pressure in the months ahead. Moreover, the threat of a cut-off of Russia from the global economy poses a risk to global liquidity as well.

However, going into the Russian offensive, global economic surprises suggest a continued firming in activity providing some cushion against the late February events.

The geopolitical shock serves to add to the pressure on what had been richly priced credit markets as we have been highlighting since late 2021.

Even with this, US spreads moved from historically tight to now back to pre-pandemic averages. With Europe at the epicentre of this geopolitical crisis, eurozone spreads have moved to pre-pandemic cyclical wides, though short of pricing outright recession in the single currency area.

With German and US 10 year yields having retreated from their early 2022 peaks, risk of higher yields and wider spreads remains looking forward, especially as the danger of a liquidity and/or prolonged inflationary shock looms. As a result, we continue to lean on fixed income hedge fund strategies to shield investors from both while focusing on increasing the quality of overall credit exposure.

As events escalated in early February, we incorporated put protection into portfolios. As tension became an invasion, our analysis highlights that since 1940, prolonged cross border conflicts have proven challenging for investors prompting us to add further protection in late February.

Our preference for quality equities globally, shifted from a headwind in January to tailwind in February; US and Swiss equity markets outpaced more cyclical Euro area counterparts.

Indeed, we continue to believe a focus on high visibility, high quality earnings streams combined with proactive asymmetric risk management strategies will offer investors shelter from this new, added uncertainty introduced into the global economic and corporate earnings outlook.

Read March's full Monthly Investment Outlook brochure here.