World leaders were warning there could be a full-scale invasion of Ukraine, but the markets were clearly not fully pricing it in, as evidenced by the 39% dollar terms drop in Russian stock prices on Thursday, a bigger crash than Russia suffered when Covid first hit.
Conflict in Europe raises risks for the global economic outlook and heightened levels of uncertainty could continue for some time. Our multi asset funds have been resilient to this shock, helped by their broad diversification and tactical overweight in commodities.
Equity markets have borne the brunt of the sell-off and volatility is likely to remain high for the next few days or weeks as the situation in Ukraine develops. However, with investor sentiment now at its most depressed level since March 2020, short-term risk could soon be to the upside, as we reach and pass the period of greatest uncertainty (Figure 1). Markets could also be supported by a partial rowing back of monetary policy tightening expectations as rate hikes are delayed or reduced in size.
Figure 1: Global stock prices and RLAM Investor Sentiment Indicator
Source: Refinitiv Datastream as at 18/02/2022
The Ukraine situation raises risks to the global economic outlook through the potential impact on markets, business confidence and inflation. Much of course depends on how events unfold from here, but the main impact looks likely to be inflationary, via increased energy prices.
As things stand, we’d most likely use a strong rally in stocks to reduce our position from a small overweight to neutral or underweight. Outside of the crisis, there are still challenges for expensively priced stocks, with the business cycle stuck in Stagflation with growth slowing and inflation rising (Figure 2). Once the near-term uncertainty clears, central banks may find they need to tighten policy even faster to counter more persistent inflation expectations. This is a poor backdrop for stocks, especially the more expensive sectors and regions like technology and the US market where we are currently underweight in our funds.
It is our hope and expectation that inflation comes down from current levels at some point this year, taking some of the pressure off central banks, but there is not yet much evidence of this happening.
Figure 2: The Investment Clock is in Stagflation
Source: RLAM. For illustrative purposes only. Trail shows monthly readings based on global growth and inflation indicators.
With volatility high and much uncertainty remaining, the Ukraine crisis underlines the value of broad diversification as a way to improve resilience to shocks. Our multi asset funds include commodities, commercial property, and a larger allocation to the less expensive UK equity market, all areas performing well or relatively well during this more inflationary period.
Past performance is not a reliable indicator of future results. the value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. Multi asset funds are a sub-fund of Royal London Multi-Asset Funds ICVC, an open-ended investment company with variable capital with segregated liability between sub-funds, incorporated in England and Wales under registered number IC001058. The Company is a non-UCITS retail scheme. The Authorised Corporate Director (ACD) is Royal London Unit Trust Managers Limited, authorised and regulated by the Financial Conduct Authority, with firm reference number 144037. For more information on the fund or the risks of investing, please refer to the Prospectus or Non-UCITS retail scheme Key Investor Information Document (NURS KII Document), available via the relevant Fund Information page on www.rlam.co.uk. Equity funds are a sub-fund of Royal London Equity Funds ICVC, an open-ended investment company with variable capital with segregated liability between sub-funds, incorporated in England and Wales under registered number IC000807. The Company is a UCITS umbrella fund. The Authorised Corporate Director (ACD) is Royal London Unit Trust Managers Limited, authorised and regulated by the Financial Conduct Authority, with firm reference number 144037. For more information on the fund or the risks of investing, please refer to the Prospectus or Key Investor Information Document (KIID), available via the relevant Fund Information page on www.rlam.co.uk.
The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.