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Market Update - Geopolitical developments surrounding Russia-Ukraine

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Market Update - Geopolitical developments surrounding Russia-Ukraine

Feb 24, 2022

  • After weeks of rising tensions, a military incursion in Ukraine was announced, with reports of airstrikes and shelling across parts of the country. Developments are still unfolding, and the attention is squarely focused on military developments and repercussions, including political decisions and sanctions, which are likely to be announced soon
  • The risk-off tone has led to a support for safe-haven assets, with Gold reaching a 13-month high, CHF and JPY both bid and US Treasury yields shifting lower (price going up). Commodities are higher across the board, with Brent trading at USD104.9 and European natural gas prices surging 40 per cent on fears of supply disruption and the repercussions on inflation pressure overshadowing growth concerns for now, as futures market continues to price in 6 rate hikes in the US and almost 40bps of hikes in Europe this year
  • Weak sentiment is weighing on equity markets, with European indices down 3.5 per cent and underperforming US stocks which are poised for a 2 per cent - 2.5 per cent decline ahead of market open. Russian equity markets are down over 30 per cent, whereas illiquidity in the bond market has pushed USD sovereigns down by as much as 35points, with the yield curve inverted
  • Investors should stay invested and not panic as geopolitical events have historically led to sharp – yet short lived corrections as the broader economic context will eventually dominate. Nevertheless, the escalation of events and the elevated uncertainty of how the situation will unfold requires a more prudent stance in portfolios, whereas the impact of high energy prices on inflation requires diversification
  • We downgrade our view on global equities to neutral, reducing our US equity overweight and bringing European equities to a mild underweight. We cut Russian bonds to underweight, and use proceeds to add to cash (tactically), US investment grade bonds and hedge funds. Portfolio diversification remains paramount, and we emphasise a balanced approach between cyclicals and defensives. We upgrade CHF to neutral and remain negative on the EUR, whereas our existing allocation to gold provides a good hedge. Energy stocks will remain in favour, and our long-term themes on Total Security (including cybersecurity) and Energy Transition (benefitting from diversification of suppliers) remain appealing

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