The Ukrainian Crisis analyzed by Multi Asset Team

Published on February, 24th 2022Market and research
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Frank TRIVIDIC

Deputy Chief Investment Officer

[Invest. Pro.] Intended for Professional Clients in accordance with MIFID.

Written by Frank Trividic, Head of Multi Asset Team, Deputy Chief Investment Officer at Seeyond, on February 2022 24th

Vladimir Putin's decision to launch an all-Ukrainian attack put an end to the last hopes of a short-term diplomatic solution. An unfavorable spiral from an economic point of view is now inevitable, with retaliatory measures on the part of Western countries which will necessarily be significant, with a macro-economic impact which remains to be assessed.

Financial markets were already under pressure from sharply rising inflation in many regions, forcing the main central banks to significantly tighten their monetary policy. However, the prospect of a very broad reopening of services, particularly in Europe and the United States, made it possible to envisage a recovery in the markets against a backdrop of very cautious positioning by investors. The Ukrainian crisis therefore upsets this scenario.

We had significantly reduced our exposure to the equity markets between the end of 2021 and the end of January 2022, while remaining very cautious on the interest rate markets. Combined with relative positions in the markets least sensitive to rising rates and rotation out of the US tech sector, our views so far have helped to lessen the impact of the recent turmoil.

From the beginning of February, we believed that a rebound was possible given a favorable technical environment. The latest geopolitical developments force us to reconsider the situation and make a significant adjustment to our positions. We are again reducing equity market exposure and most of our relative positions. For several days, we had also bought long-term government bonds (US, Germany, UK, Japan), which once again allowed us to cushion the shock and obtain a more robust allocation in the event of a worsening of the situation. In the short term, the equity market risk premium should continue to increase. The uncertainty surrounding the scale of the new sanctions and their impact on the economic and financial environment does not allow for a rapid calm to be envisaged. And even less a sustainable recovery of risky assets. At a time when they have to ratify a significant change in their monetary policy, central banks will have to integrate these elements into their analysis of the situation. In fact, inflationary pressures will increase further in the short term, but the risks of slower growth in the medium term will also increase. A dilemma that should weigh in the choices of the FED at its next meeting (March 16)...

We believe that the Ukrainian crisis is not yet likely to definitively change the medium-term outlook and derail the global recovery. But it is large enough to generate short-term uncertainty in an otherwise fragile market environment. We therefore prefer to reduce the risk profile, take the time to assess the situation and keep the possibility of taking advantage of opportunities that may arise in the weeks to come.

This article has been provided for information purposes only to professional clients as defined in the MiFID Directive. It must not be used for retail investors. The provision of this material or reference to specific sectors or markets in his article does not constitute investment advice or a recommendation or an offer to buy or sell any security. Investors should consider the investment objectives, risks, and expenses of any investment carefully before investing. Views expressed in this article as of the date indicated are subject to change and there can be no assurance that developments will transpire as may be forecasted in this article.