Inside View: Ukraine/Russia fallout for private banking
Five CIOs discuss asset allocation changes in light of the tension in the border countries.
Jorge Mariscal, emerging markets CIO, UBS Wealth Management:
We remain overweight Russian equities and view corrections in Russian hard-currency sovereign bonds as a buying opportunity, barring the unlikely event of significant military escalation. Russian stocks are more than 60% cheaper than emerging-market equities overall as a multiple of earnings.
Russia is also a net external creditor with international reserves of 24% of GDP, as of the end of 2013. Ukraine will probably delay gas payments to Russia and restructure its hard-currency debts to a degree, but the effects will prove manageable for Russian companies.
However, the situation is very fluid. If the risk of significant military escalation grows substantially, we would review our stance on Russian assets. If such an escalation occurs and spills over to a conflict between Russia and the west, we would expect negative consequences for global risk assets.
Ukraine would probably default outright on its hard-currency debt, Russian equities would face a meltdown, and further downside would be likely in Russian sovereign bonds. The US dollar would probably act as a main safe haven for investors.
Michael Wilson, CIO, Morgan Stanley Wealth Management:
As far as the recent events in the Ukraine, we haven’t made changes since December. However, we do expect to see events like this having a greater impact on the broader market because of where we are in the rates cycle.
So whether it’s the Ukraine or Argentina or concerns about China’s trust products defaulting, these events will have a bigger impact on markets simply because the Fed and other central banks are tightening policy.
These events happen all the time, but the overriding issue is volatility is likely to rise. So we are telling clients to look to alternative-type investments away from traditional equity and fixed income to help smooth volatility.
We do not expect events in the Ukraine to turn into something more significant at this time, but we think a diversification to non-correlated assets is helpful – macro strategies, market neutral strategies, but even MLPs, Reits and commodities can buffer the volatility.
Over the last two months – commodities have been a great offset to volatility, for example.
Richard Madigan, global CIO, JPMorgan Private Bank:
Recent events in the Ukraine reflect classic geopolitical event risk. While we are watching events closely, we haven’t changed our asset allocation because of recent events. You can’t manage investment portfolios around geopolitical noise unless you feel an event has fundamentally changed the outlook.
In the case of the Ukraine, we don’t believe events to date have changed our outlook of a measured European recovery.
We remain constructive about the amount of investment risk we have in portfolios and well positioned for the amount of volatility we’ve so far seen across markets. Should there be a more meaningful correction driven by geopolitical headlines that don’t represent a change to our macro view, we’ll likely add to current equity positions.
Eric Verleyen, CIO, Société Générale Private Banking Hambros:
Although this confrontation is casting political and economic uncertainty, we still consider that the risk of a major upheaval is to be contained. Yet any military or political escalation would warrant a reassessment of the situation.
Assuming a quick resolution of the crisis, consequences on financial markets are likely to be limited. However, these events highlight the return of political risk at the forefront in the emerging-market space and are a demonstration of the EM specific risk that has probably been underestimated by investors in the past few years.
As this may continue to impact EM assets including currencies negatively, we remain underweight on the asset class.
Russian equities that have consistently traded at low price/earnings multiples on the back of corporate governance issues may need further time to head for a re-rating.
Although economic policy has been moving to the right direction in recent years – setting up of an oil-stabilization fund, inflation targeting – the intervention in Ukraine may warrant renewed cautiousness as Russian politics has become again unpredictable.
As for developed equity markets, we are keen on keeping a positive view on risky assets. For sure, higher uncertainty in the short term will feed into higher volatility but this is part of our main scenario.
Michael Strobaek, global CIO, Credit Suisse:
Events in Ukraine have re-introduced tail risk (small probability of a highly disruptive event), but our base case is still that de-escalation is in all parties’ interest and our outlook for a broader global economic recovery is unchanged.
Countries in Europe and Asia that have close economic ties with Russia will find it difficult to back economic sanctions against Russia. But, regardless, tighter monetary policy and weak business sentiment implies a weaker growth outlook for Russia itself.
We keep our investment strategy unchanged. We have a relative preference for the US dollar and energy commodities. Both asset classes should benefit in our base-case scenario of broader economic expansion as well as in the unlikely case of resurging tensions in the Ukraine-Russia crisis, thus providing a hedge.