As the war in Ukraine enters its second month, Wall Street is considering an array of possible outcomes, from de-escalation to protracted conflict. Goldman Sachs Group Inc. is recommending cheap hedges against stagflation in one scenario. BlackRock favors short-dated bonds in another. French titan Amundi SA is warning of tighter liquidity.
Investors who’d taken to the sidelines at the time of the Russian invasion are under increasing pressure to hedge their risks. Many investment specialists say they’re ditching high-conviction strategies that bet on market direction.
“We’re living in a climate of elevated geopolitical uncertainty,” said Mark Dowding, chief investment officer at BlueBay Asset Management in London, which manages $127 billion in assets. “Some of this increase in the risk premia is likely to be permanent because we’ve seen something seismic in the course of this month. Who knows what’s going to happen at a moment’s notice? We could have any headline in the next hour or two.”
A point of consensus is that inflation isn’t subsiding any time soon, and many warn that liquidity and trading conditions may get far tougher.
“Market liquidity conditions appear resilient so far, but this is a point of attention,” said Vincent Mortier, Group Chief Investment Officer of Amundi, Europe’s largest money manager with $2.3 trillion of assets under management. They’ve hedged portfolios with derivatives, such as credit default swaps and put options.
Here are some of the scenarios:
Long War
“A protracted war is the middle of the road scenario that looks likely to many,” said Agnes Belaisch, chief strategist for Europe at Baring Investment Services Ltd. in London. “Investors prefer not to position for any given scenarios about war and peace, given how out of any rationale the path ahead is. Escalation is the worst outcome that many prefer to keep a tail risk.”
The U.S. dollar remains a solid haven asset, in her view. Eurozone peripheral short duration bond spreads are attractive as “we believe the ECB will stay relatively loose on monetary policy, protecting the carry,” she said.
Long positions in small- and mid-cap technology stocks could do well in an era of intensifying national security, according to Mark Haefele, CIO at UBS Global Wealth Management. UBS Group AG manages $2.6 trillion in assets, according to its website. He favors investments in the cybersecurity sector and enabling technologies such as 5G+ in wireless telecommunications.
U.S. dividend-paying stocks are a haven given their exposure to the “beneficiaries of rising energy prices as well as businesses that provide stability through heightened volatility,” Michael Fredericks and Justin Christofel at BlackRock Financial Management Inc., wrote in a note to clients Wednesday.