As news of the Russian attack on Ukraine poured in yesterday morning last week, we saw a significant correction in risk assets. Most major equity markets were down 2-3% with Europe in particular, down 3-5% given the region’s proximity and dependence on Russia. While there were murmurs this could happen, it was not completely priced into markets. Europe in particular had outperformed the US in2022 and had largely been immune to geopolitical risk till date. The next big risk could be if China takes cues from this situation and takes a more aggressive stance towards Taiwan. Overall, this means that we will likely continue to see extended volatility in markets. Year-to-date, major markets are already down more than 10%, with Nasdaq down approx. 20%. As such, we are seeing portfolios down 5-12% this year and most investors who had gotten used to the low volatility, no drawdown regime, are feeling quite nervy.
While this could continue for some time and lead to more downside, we think geopolitical events like these rarely have a lasting impact on markets. As such, investors would be better off looking through this temporary noise and remain focussed on the underlying economy. Across most markets, fundamentals still look decent and growth remains above-trend if we look at PMIs, GDP trackers and corporate earnings. Events like these present attractive opportunities for long-term patient investors. It is important that investors stay on top of their asset allocations, stick to their original plan than be reactive and avoid taking risky exposures to recover losses. It is also may also be completely ok to sell out of low conviction risky positions even at a loss, as one would rather keep the high quality high-quality winners than low quality losers in the long run.
Outside of equities, fixed income and commodities provide decent hedges during such times.We have already seen crude oil flirt with $100 / bbl and US 10y yields have plunged almost 7-8bps yesterday. We have been of the view that despite the imminent Fed hikes, owning fixed income at intermediate to longer durations provides a hedge during growth shocks. We have also been overweight commodities for almost 6 months now and investors who have exposure to these asset classes have benefitted. For investors looking to make the most of panic selling, we think beaten down high quality high-quality stocks like MSFT, GOOGL, within the big-tech names etc. or broader large-cap equities (US, Europe, EM), present attractive levels to enter in a phased manner. Given elevated volatility levels during such times, selling volatility via ELONs / structured notes can may also add attractive income characteristics to the portfolio. Similarly, taking advantage of the widening in credit spreads to engage in high quality corporate issuances that provide a decent coupon is could also be also attractive. At the same time, while we still like commodities – base metals and oil and energy-oriented sectors (XLE ETF), levels are no longer as attractive. Remember – be patient, don’t react / check positions daily and avoid biases!
By
Ankit Agrawal
February 25, 2022
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We are licensed in Singapore, Hong Kong and India. Kristal Advisors (SG) Pte. Ltd. presently operates under the CMS license by the Monetary Authority of Singapore (MAS). Kristal Advisors (HK) Ltd is licensed and regulated by the Securities and Futures Commission (SFC) to carry out Type 4 and Type 9 regulated activities and is not involved in the discretionary management of any collective investment scheme. Kristal Advisors Private Ltd. presently operates as a Registered Investment Advisor under the jurisdiction of the Securities and Exchange Board of India (SEBI).
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