Market Views: How the great Russian divestment is disrupting asset allocation

Investors worldwide are looking to cut their exposure to Russia and reallocate funds to other markets. We ask experts for their views on the implications for allocation changes.
Market Views: How the great Russian divestment is disrupting asset allocation

Countries around the world have imposed a range of economic and other sanctions on Russia after its invasion of Ukraine on February 24, 2022.

They are aimed at choking Russia’s access to foreign financing and reserves in the hope that it can bring about an end to the conflict.

Several western countries have frozen the Russian central bank’s assets, restricting its ability to access $630 billion of its reserves.

The EU has banned Russia from raising sovereign debt and stopped listing the shares of state-owned entities on EU stock exchanges.

Selected Russian banks are being removed from the SWIFT international payments system which will affect payments for Russian oil and gas exports and money transfers across the border.

In response, Russia has imposed strict capital controls, bans on transfers to foreign investors, and shuttered the local stock exchange.

AsianInvestor reached out to experts for their opinions on how the sanctions will affect asset allocation strategies.  

The responses have been edited for clarity and brevity.

Michael Kelly, Managing Director, Global Head of Multi-asset
PineBridge Investments

Michael Kelly
PineBridge Investments

Not surprisingly, equity markets have borne the brunt of the risk-off sentiment owing to Vladimir Putin’s invasion of Ukraine. Over the intermediate term, markets will shift their focus back to the inflationary environment, a backdrop restraining all financial assets, yet one where equities can grow their way back after sustaining an initial de-rating.

In contrast, government bonds are likely to languish for the foreseeable future. Although recent geopolitical events have affected European equities the most, we expect this to be temporary, and see prospects for European growth to reassert itself over the intermediate term as stepped-up military spending takes hold and new energy investments are pulled forward.

While all emerging market assets are now trading as if they’re “guilty until proven innocent,” given the uncertainty caused by Putin’s invasion, Latin America local currency bonds are holding up well considering this global risk-off backdrop.

The idiosyncratic local conditions – high, albeit peaking, inflation and rates, plus rising commodity price tailwinds – are likely to dominate any global macro or geopolitical pressure, making such exposure an attractive portfolio diversifier. We view LatAm as the one area in the world where investors should consider owning longer-dated paper.

In G10 markets, we maintain our short duration posture, expecting central banks to be more focused on inflation than growth, particularly in the US, where overheating conditions continue.

Harmen Overdijk, Chief Investment Officer
Leo Wealth

Harmen Overdijk
Leo Wealth

No matter what happens next, it is unlikely that the relations between Russia and the West will improve any time soon. As was the case during the original Cold War, both sides will likely come to an understanding that allows the establishment of mutually beneficial arrangements.

The near-term outlook for risk assets has deteriorated, despite the sell-off we already experienced. However, on a 12-month horizon we continue to expect stocks to outperform bonds as the global economic recovery maintains momentum.

While more downside is not unthinkable, it is also impossible to predict what is going to happen next. Cash may seem attractive given the volatility, but the combination of value-eroding inflation and re-entry timing concerns make large cash allocations problematic.

In this environment, we favour staying invested in a diversified global portfolio, which should include an allocation to commodities and precious metals. As the US is less likely to be impacted by energy price spikes, US markets are still the place to be. The same goes for US fixed income, especially the short-duration credit yield space.

Jian Shi Cortesi, Investment Director, China and Asian equities
GAM Investments

Jian Shi Cortesi
GAM Investments
After a dramatic downcycle in the last 12 months, China was outperforming at the beginning of the year as the Federal Reserve began discussing rate hikes while China was going through a rate-cutting cycle. However, the Russia-Ukraine conflict impacted global markets negatively and at the end of February, China was down 6.7% year-to-date, with a similar picture in Asia.
One main impact of the Russia-Ukraine conflict is higher oil prices. This is particularly challenging for an oil-importing country such as India. In terms of international trade, we do not expect it to have a major impact as China’s export to Russia is actually quite small given Russia’s GDP is about the size of one big province in China. On the other hand, as Russia is being boycotted by many countries, it may rely more on trade with China.
The companies in the Asia/China portfolios have very limited Russia exposure. We are currently not making tactical changes. The current situation reinforces our view, rising oil prices and potential supply disruption will further incentivise many countries to push forward with renewable energy. Asia/China are leaders in many renewable areas such as solar, wind, electric vehicles, and batteries. We continuously look to increase exposure in these areas at attractive prices.

Andrew Zurawski, Associate Director
Willis Towers Watson

Andrew Zurawski

I would be surprised to see any institutional investor in the region having a direct allocation to Russia. Any exposure is most likely small and part of a broader global or emerging market equity, bond fund, or mandate.

However, if Russia is in the fund’s benchmark, and the investor has adopted a passive approach, then they will have exposure. At this point in time though, it is difficult – and probably too early - to see divestment flows and we haven’t seen any instances of making benchmark changes or forcing divestments yet.

Many longer-term investment strategies that we recommend sticking to during periods like this should expect to withstand events such as these and be positioned accordingly. It’s important to note that one of the key reasons we believe in running portfolios that are typically more diversified than others is because events that are extremely hard to predict happen regularly, and even if you could predict them, the second-order impacts they create are even harder to predict.

Higher commodity prices and increased uncertainty in the near term may impact shorter-term asset allocation though - away from risky assets to assets with more inflation protection. Risk asset prices have come off recently, which may provide opportunities going forward.


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