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Outlook on Ukraine Attacks

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Updated February 24, 2022

Yan Arsenault CFA®, CAIA, Chief Investment Officer

Our comments below are focused on markets as this is our area of expertise, not to understate the humanitarian fallout. We hope for a peaceful and swift resolution.

This morning, Russia commenced an invasion on its Western neighbor, Ukraine. The situation remains very fluid, but likely came more quickly than expected to leave Ukraine and its allies unprepared as they have just begun to establish next steps.

Why is Russia Invading Ukraine?

The official line states Russia is invading to protect Russian citizens, especially those in the self-proclaimed Russian republics of Donetsk and Luhansk who declared such independence in 2014 when Russia last invaded Ukraine. However, Russian interests go much deeper. The collapse of the Soviet Union in 1991 left Russia vastly depleted from its former days of empire building. Security analysts believe this “one people, single whole” mentality is the true root. Further, it is believed Russia wants the end of NATO expansion particularly in contiguous states (Ukraine, Belarus, Georgia).

What is happening in Ukraine?

Overnight, Russia launched a series of coordinated attacks on key military targets across the Ukraine including air, ground and amphibious assaults.

Ukraine Russia Chart
Source: Bloomberg

How have markets reacted?

As expected, risk assets have retreated on the unfortunate news. Broadly, equities, even those with modest or very little connection to activities in the region, have sold off in sympathy. Gold, treasuries, and other risk-off havens have gained in value. Commodity markets have also reacted with oil prices moving over $100 a barrel. European natural gas contracts moved up as much as 31% based on the news given Russia is a major supplier to Europe for the natural resource. As of close yesterday, Russian equities were down over 22% YTD. It is likely they will see continued pressure in the short-term as the US and EU allies weigh additional sanctions and actions. Globally, currency markets are reacting as well. The Russian Ruble fells as much as 9% relative to the U.S. dollar and Ukraine suspended its currency operations under martial law.

How does this impact our portfolios?

Very little. Most accurately, Russia-domiciled stocks are only 0.62% of Balanced Growth portfolios. Within fixed income, our active managers have a combined 0.36% exposure.

What is the impact on our managers?

Our active managers are well aware of the current environment. While decisions will vary from manager to manager, many of our fund managers have held their current positions viewing this as a transitory and macro event. Clearly the situation is fluid and these opinions may change. However, even if current allocations to the country prove detrimental, we believe these highly capable and skilled managers add value throughout and over a cycle. Not simply on getting one “call” right or wrong.

Does this impact the Fed?

Central banks globally, including the Fed are in a difficult position. With interest to keep prices under control while not smothering economic growth, they are walking a fine line. Markets largely expect a 25bps increase from the Fed after its March 15/16 meeting. However, conversation has been drifting to a 50bps increase given recent headline inflation numbers. The invasion has a dual effect of adding fuel to the fire of inflation with higher energy prices, but may provide the Fed aircover to move at the more modest pace of 25bps based on greater uncertainty. A 25bps increase is presumed to be the preferred path for the  Fed. Futures prices that indicate the market’s “best guess” on what the Fed will do in March also reflect this change in sentiment as shown below.

Chart
*Data as of 24 Feb 2022 7:11am

How does this change our outlook?

At this time it does not. While this is a very unfortunate humanitarian event, at this point it has limited global significance to broader themes built into our portfolios. While a material headline event today, we believe the Russia/Ukraine crisis will have limited impact over the long-term. We encourage clients to stay focused on the long-term and stay invested.

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Yan Arsenault CFA®, CAIA, Chief Investment Officer