Ukraine Update

With the developments overnight in the Ukraine, Daniel Murray explains our current thinking on the situation in this Macro Flash Note.

• The short term situation remains highly fluid and uncertain. Markets have responded as would have been expected: safe haven assets have rallied, risky assets have sold off; the prices of various commodities have increased; volatility has spiked.
• It is important to form an objective view based on the facts (growth, the corporate environment, the policy outlook etc) and to try to look through the short term volatility. Don’t panic!
• The direct impact on markets of events in Ukraine are limited. However, the indirect impacts are potentially larger, such as via higher energy and food prices.
• Higher energy and food prices feed through to higher inflation and also act as a tax on consumption. As a result, we expect some short-term economic impacts.
• At the moment, there has been no major impact on the outlook for central banks - perhaps a minor downgrade to rate expectations - although the longer the situation persists the greater the negative impact on expected future economic activity. That would be expected to result in a softer outlook for monetary policy than currently anticipated.
• There is a lot of bad news priced into markets. We are continuing to assess the situation and adjusting our investment views accordingly.
• Whilst the overall message is one of remaining calm and trying not to get caught up in the short term emotions of the situation, we think it is still too early to start increasing exposure to risk assets. However, with the recent market dislocations, we think opportunities are emerging.
• The opportunities we are starting to see develop are in the following areas:

1. Cyber security: consistent with modern espionage and state-sponsored interference, we expect cyber security to be a complimentary arena of conflict between Russia and the West. 
2. Volatility: spikes in implied volatility often provide opportunities to sell insurance and generate yield. Such trades are not without risk but can be a way to enhance returns. As Warren Buffet famously said “Be fearful when others are greedy and greedy when others are fearful”.
3. Sectors: our preferred sectors at this point are Healthcare and Telecoms, with the latter in particular looking relatively cheap. 
4. Country / Region: we continue to favour Asian equities. The markets are attractively valued, there is a degree of post-covid catch up that the region is expected to enjoy this year, policy is accommodative and the region is less geographically exposed to events in Ukraine.

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