Multi-asset managers walk fine line between opportunity and poor taste

As conflict intensifies between Russia and Ukraine

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At a time when people are losing their lives and the threat of a widespread conflict in Europe continues to rise, writing about the investment consequences can feel insensitive.

It’s little surprise that while multi asset managers, and managers in general, have been keen to share their thoughts on how they are managing money following Russia’s invasion of Ukraine on 24 February, there has also been a need to add in a note that their thoughts are with those people most affected.

It is understandable that no group wants to be seen as in any way trying to make money out of the unfolding events. However, it is also their job to interpret what is going on amid the fall out and the subsequent impact on portfolio performance.

With this caveat in place, Thomas Becket, chief investment officer at Psigma Investment Management, said assuming the current crisis does not evolve into a global conflict, a buying opportunity does currently exist.

“Since the start of March, investing has become much more challenging and falls across markets have become indiscriminate, meaning that the ability to protect as efficiently has become harder,” Becket said.

“We have been able to offset some of the losses experienced in equity and credit markets through our ‘hedges’ in inflation-linked bonds, commodities and gold investments, whilst our high-quality fixed interest positions have also reduced potential losses,” he added.

However, Becket noted that falls in many markets in Europe and Asia have become larger as the threat of a growing conflict has risen, reversing the outperformance such markets enjoyed at the start of the year.

Pathways

As Psigma assesses the situation in Ukraine today, Becket said there are three scenarios they must factor into their analysis; the war ends, military quagmire or a major global conflict.

“Whilst the impact on financial markets is, of course, a less important factor than the humanitarian crisis now unfolding, as wealth managers we must continue to analyse how the ongoing events will impact the markets and, ultimately, our clients’ assets,” he said.

While markets have not priced in the possibility of a major global conflict, Becket said the fact the present situation in Ukraine has raised global tensions to the highest levels in decades cannot be ignored.

“It is entirely possible that Putin has grand designs beyond Ukraine and believes he has nothing to lose by pursuing an even more extreme plan for regional domination,” he said. “This should obviously be a major problem for financial markets.”

But he added: “We are certainly much more comfortable with equity valuations and excited by some of the valuations and income opportunities in credit markets. This should increase the potential for future portfolio gains, and we feel strongly that the seeds of future success can be sown in the volatility we are experiencing.

“However, we are being selective and specific and aim to continue with a tactical approach.”

Everchanging picture

For John Husselbee, head of multi-asset at Liontrust, with the situation in Ukraine shifting by the hour, there is little value in focussing on short-term news. Instead, hard as it may be, he said the team tries to keep their focus, and that of their investors, on long-term goals.

“Some of the early commentary on these events has talked about a black swan event for markets that ultimately changes the post-Perestroika landscape in Europe,” he said. “This may well prove to be the case geopolitically but looking at similar situations in the past from an investment perspective, while causing short-term volatility, they have tended not to have too much impact on longer-term performance.”

With the Second Gulf War, for example, Husselbee noted the S&P 500 started to sell-off on 21 March 2003, but this only lasted seven trading days, amounting to a 5.3% fall, and was back to the previous level within 16 days.

More topically, he said the Soviet invasion of Afghanistan saw the index start to sell-off on 17 December 1979 but, again, it only fell for 12 days, down 3.8%, and was back to its previous level within six days. The 2014 events in Syria involved a longer sell-off, 21 trading days from 18 September, but the 7.4% decline was wiped out in 12 days.

“At a headline level, it seems safe to assume the Russia/Ukraine situation will spark a setback to global corporate and consumer confidence,” said Husselbee.

“What it also brings is a strong dose of markets’ least favourite tonic in the shape of uncertainty and, already weighed down by impending rate rises, we have seen indices such as the Nasdaq dip into bear territory, down more than 20% from recent peaks, before rebounding slightly at the month end,” he added.

As such, while current news flow is broadly negative, Husselbee said that apart from the US equity markets remain attractively valued and that consumer spending continues to pick up as economies open.

“This year may prove to be a test of nerve, however, and we encourage against attempting to move in and out of markets if things do get choppy; ultimately, the best antidote to short-term volatility is diversified portfolios and a resolute focus on long-term outcomes,” he said.

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