Verger condemns the Russian government’s acts of aggression towards Ukraine. The invasion has created a sad and unnecessary human tragedy that will ripple through Ukraine, Europe, and the globe. It will split families, cause significant loss of life, and result in a refugee crisis. The Ukrainian people have a lot to fight for – economic and physical freedom – and we pray for the safety of those in harm’s way. While we are hopeful that peace will take precedence over politics and the conflict will end soon, the outcome remains unclear. As we continue to monitor the complexities of the situation from afar, the Verger team shares our views on the invasion’s impact on domestic and global markets.
What sectors of the market have been most impacted?
In general, we are seeing slower growth with increased uncertainty. The gradual re-opening of global economies (dare we say) post-COVID has been a tailwind, but geopolitical risk and uncertainty surrounding the war have disrupted market activity and significant ramifications can be felt across a multitude of markets and industries. Global equities fell in February, unsurprisingly led by Russia, with the MSCI Russia Index declining over 52%. Commodities have exploded, and oil and gas prices are hitting multi-year highs. Major defense stocks are also gaining a lot of attention as defense spending budgets increase.
Domestically, we think about the role these market conditions will play in setting fiscal policy. The Build Back Better bill isn't dead yet but may be on life support with plans to scale back significantly. The Fed is under pressure to raise rates - overdue in our opinion - but must now do so in a more difficult geopolitical climate. Energy production in the U.S. will continue to be a hot topic and supply chain challenges continue to be front and center as the spotlight shifts from Russia and Ukraine to China and Taiwan.
How does this affect our clients and other institutional investors?
On Tuesday, President Biden announced that the U.S. will ban all Russian oil imports stating that, “[the U.S.] will not be a part of subsidizing Putin’s war.” These actions will have significant impacts on not only the positions of a portfolio but may even redefine the parameters of the investable universe if institutional investors can no longer access the Russian markets and economy. Just last week, MSCI and FTSE Russell took steps to remove Russian companies from their emerging markets indices. Additionally, non-Russian companies that historically generated material revenues from Russia or companies forced to cease doing business in the country (due to sanctions or operations disruptions) will likely experience a hit to their top lines and ultimately their profitability.
The situation in Russia and Ukraine is fluid and visibility is low. We have yet to make any meaningful changes to the Verger portfolio in response to the conflict, but we continue to monitor it daily. We believe volatility will continue and should provide opportunities to investors positioned with liquidity who can take advantage of market dislocations.
What is Verger’s exposure to Russia?
Verger has never had a dedicated mandate to invest in Russia given our concerns about governance and the Putin-style “rule of law.” We do have a very small exposure to Russia through a few underlying managers. This exposure is measured in basis points, not percentages, and we have no plans to add to it.
What is next?
We remain in the early stages of the Russia-Ukraine conflict. Momentum will continue to ebb and flow, and we expect this war may play out over a long period. Russia's initial attack was sloppy. The Ukrainian resistance was far stronger than anticipated, and Ukrainian President Zelensky’s leadership and ability to inspire his country (and the world) have been a bright spot. But the Russians continue to make gains and Ukraine's supply lines are seriously constrained. We expect a significant humanitarian crisis to unfold in the coming weeks. The scenario where Russia invades Ukraine has already manifested, but a scenario where Russia potentially occupies Ukraine long-term is a different matter entirely.
The market continues to show fragility under the surface but also resilience in the face of significant corrections. We believe that the Fed’s resolve in raising rates to slow the rise of inflation is a new variable in the “buy the dip,” “FOMO,” “stocks only go up” mentality that has prevailed over the last few years. A World War risk is very small, but it is there, and that is enough to shake the confidence of even the most hardened day trader. The lack of liquidity, the depleted political capital, inflation, and still relatively high valuations among risk assets, particularly in the U.S., should make this market a bit more difficult to navigate over the next few quarters.
The team at Verger is saddened to see this tragedy and loss of life unfold in real-time. Our thoughts are with everyone – Ukrainian, Russian, and otherwise – impacted by this unnecessary act of aggression.