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Ukraine latest - asset allocation update

16 days ago
The Ukraine crisis continues

The war in Ukraine has entered its third month, with Russian forces sustaining continued heavy losses in the Donbas region. The EU (European Union) is working on a sixth round of sanctions against Russia, including a phased-in ban on imports of Russian oil by year end. Meanwhile, Russia cut off gas supplies to Poland and Bulgaria, judged to be ‘unfriendly’ countries as they are unwilling to pay for supply in roubles.

Macroeconomic impact

The price of European natural gas leapt 20% on the day that Russia cut off Poland and Bulgaria. Upward momentum of the oil price has moderated, however, as markets weigh an estimated 30-40% drop in Russian production with falling demand from China, where zero-Covid lockdowns persist. As inflation reports rise ever higher, central banks have begun tightening their interest rate policy in response. The IMF (International Monetary Fund) cut its global growth forecast, largely due to the inflationary pressures of the Ukraine crisis.  

Market reactions

Equity markets remain in poor shape, with elevated levels of volatility. The US S&P 500 index is flirting with a 10% correction from recent highs, while the Nasdaq sits firmly in bear market territory. Government bond markets also remain volatile, and the US Treasury yield curve has steepened once again, in anticipation of an accelerated pace of interest rate rises. The US dollar remains in demand, offering a safe haven with a potentially rising yield, while the price of gold has ticked lower.

 

Architas view

Architas view

Our asset allocation stance is largely unchanged this month, as we believe markets seem somewhat complacent in the face of a trio of significant uncertainties: the Ukraine offensive appears to be bogged down and the outcome unclear; China’s zero-Covid lockdowns will weigh on growth and boost inflation; and despite central bank plans it is too early to declare peak inflation.

We remain underweight equities via a moderate underweight in Europe, with a relative preference for US and Asia Pacific equities. With regard to fixed income, we remain underweight on government bonds as central banks look set on an aggressive response to inflation. We have moved back to neutral on investment grade credit, believing this to be an attractive entry point. Furthermore, we have moved to moderate overweight on high yield debt, which currently offers a yield level above 7% in the US dollar asset class.

Elsewhere, we remain overweight cash and alternatives. Overall, we look to quality and defensive growth to provide better performance in the near term, as uncertainty and volatility remain at heightened levels.

Look out for further updates as the situation evolves.

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