KMW Financial Services | Perspectives – Russia and Ukraine
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Perspectives – Russia and Ukraine

Perspectives – Russia and Ukraine

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Good afternoon,
Following is a quick update on the current Russia and Ukraine conflict, courtesy of our asset consultant team – Oreana Portfolio Advisory Service.
In this Perspective, we answer some questions and provide some guidance through this challenging episode.
Please do not hesitate to contact your adviser should you wish to discuss.

Russia and Ukraine: an update amidst uncertainty

The Russia and Ukraine conflict is a source of significant uncertainty for markets. The Russian  presence along the border has given way to recognition by Russia of two separatist regions.  Russia has sent military support into the regions under the guise of peacekeeping. The West  has responded with sweeping sanctions. The outcome is exceptionally uncertain. In this  Perspective, we answer some questions and provide some guidance through this challenging  episode.

What are the potential scenarios?

We believe in recognising the limits of our expertise. We do not have any clear information  on the posturing and machinations behind Russian President Putin’s actions. We have no  insights into the response from Washington or Brussels. So, we do not aim to build a “most-  likely outcome”. Instead, we recognise our lack of expertise and accept that the range of  potential outcomes is extraordinarily wide. They range from extremely bad outcomes (e.g a  global hot conflict) to much better outcomes (e.g resumption of diplomatic efforts).

Plausible scenarios in the middle of this range include:

  • Concessions to Russia to allow them to gracefully stand down.
  • Occupation of the separatist regions along the Ukrainian border, with no NATO  military involvement.
  • Full scale invasion with no or limited NATO military involvement, but significant  economic sanctions from the West.
  • Full scale invasion with NATO military involvement, and significant sanctions from the  West.
  • Full scale invasion with NATO military involvement, significant sanctions from the  West, and weaponization by Russia of its oil, gas and soft commodity exports.

What are markets pricing in?

Global equity markets have declined almost 8% this year. Over half of that decline has  occurred through February. US 10-year Treasury yields are 0.42% higher so far this year. But  safe haven flows have knocked that yield 0.11% lower over the past week. Safe-haven flows have also pushed gold higher.


Markets have rushed to increase risk premia in equity and bond markets. Risk premia had  already widened as the Fed moved to a more aggressive policy tightening stance.

And as uncertainty persists, and until we have clarity around which scenario we are in, we  expect more risk premia will be priced in the near-term. That means potentially further near-  term declines in equity markets, and declines in sovereign bond yields.

Has the medium-term outlook changed?

We don’t think so yet. The prevailing narrative remains solid economic growth. Temporarily  higher inflation. And increasing cash rates in the major developed economy central banks.

Markets have moved to price as many as seven rate hikes from the US Federal Reserve this  year. There was a greater than 50% probability priced for a 0.50% rate hike at the March  meeting. The Fed has indicated it will engage in significant balance sheet reduction this year.

We expect that would result in an inverted yield curve – an incontrovertibly negative  outcome for the economic outlook. We have pushed back against that rate hike consensus,  although we have no quarrel with a pathway for higher cash rates over the coming 24  months.

At the margin, the uncertainty allows the Fed to be more circumspect about their pathway to  rate normalisation. That should allow the US yield curve to remain positive over the medium-  term. And we expect that will allow solid economic growth and solid earnings growth to  support equity market returns at attractive levels.

What can investors do?

Periods of episodic extreme uncertainty are not times to make knee-jerk reactions. Markets  can move non-linearly, in unexpected directions, aggressively and rapidly. Instead, now is the  time to rely on your clear investment philosophy and investment process.

For predominately strategic asset allocation (SAA) investors, that means relying on  diversification. Exposures to cash, sovereign debt, high quality fixed interest play an  important role in SAA portfolios. That role came under serious challenge through January.  Longer-dated bond yields surged and drove capital losses in portfolios. The importance of  having some downside protection against uncertain outcomes is highlighted by the recent  market movements. As is the critical importance of rebalancing portfolios after significant  asset moves such as we saw through 2021.

For dynamic asset allocation (DAA) or active investors, the challenge is to push back against  the temptation to make short-term portfolio changes. Instead, it is important to rely on  process. For us, that means:

1.  Review scenarios that could materially change the medium-term outlook.
2.  Review the existing medium-term outlook against those scenarios.
3.  Consider whether the portfolio will need adjusting if those scenarios materialise.
4.  Adjust the portfolio, if necessary, when we get more clarity about the Russia Ukraine  conflict outcome.

Importantly, we recommend being aware of sell-the-rumour, buy-the-fact events. Previous  conflicts that have driven episodic widening of risk premia have been followed by rapid  narrowing of risk premia after the uncertainty has declined. In other words, as the negative  news flow grows, investors may price in ever-more negative outcomes. They may become  overly pessimistic. Subsequently, even a relatively bad absolute outcome can be better than  market expectations – and result in a perverse increase in equity prices.

Sinclair Financial Group
Level 2, 47 Warner Street
Fortitude Valley QLD 4006
P (07) 3117 0607
[email protected]

Norman Sinclair – MFinPlan, AFP ASIC No. 249943.
Stephen Vigh – CFP, BBus (Acc & Man), Dip FP ASIC No. 239508
Kyle Medson – CFP, BCom (FinPlan & Inv) ASIC No. 328912
SFG Capital Holdings Pty Ltd trading as Sinclair Financial Group, ABN 42 609 798 469
Authorised Representative of Oreana Financial Services Limited
ABN 91 607 515 122, Australian Financial Services Licensee No. 482234
Registered Office Level 7, 484 St Kilda Road Melbourne, Victoria 3004 Australia
This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.




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