Ukraine crisis – what investors need to know
Ukraine crisis – What investors need to know
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[Ukraine crisis – What investors need to know]
[CIBC logo]
[Luc de la Durantaye, Chief Investment Strategist and CIO, CIBC Asset Management]
In our last update, we had mentioned that 2022 would be an eventful year, and so far it has not
disappointed. The events in Ukraine have forced market participants to re-evaluate their global
economic scenario, and the range of possible market outcome has widened in light of Russia's
full military action and also the increased unpredictability of the geopolitical environment, as well
as the rapid and collective response of Western countries. And so, these developments have
naturally translated into higher volatility. So while it remains certainly an understatement that
predicting what Russia's President Putin will do or not do, nevertheless, it's a necessary evil, if
you will, to re-evaluate the environment. Our best take on the conflict at this time so far is that
first, I think NATO is a much stronger opponent than Ukraine. So this suggests that Russia's
invasion will most likely be limited to Ukraine, particularly given the slow progress of Russian
military is making in Ukraine. So that's an important assumption. Second, the extent of the
economic and financial backlash against Russia from G10 countries and a growing contingent
of large multinational corporations suggests that the economic warfare against Russia is very
swift and effective, which means Russia is increasingly isolated. China also is unlikely to come
to its rescue because its economic ties are much, much larger with the West than with Russia.
So this is a new form of economic and financial warfare.
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[Economic implications]
It's still uncertain, but we have both direct and indirect effects of this crisis. The direct effects:
the crisis-related sanctions will negatively affect international trade. That's the direct impact, but
it's likely to be small given that Russia contributes to less than two percent of the global
economy and Russia is not very well integrated with the global economy. The indirect effect is
likely more impactful, but also uncertain. It includes obviously expected negative impact from
higher commodity prices, including energy and food. And Russia is also a major producer and
exporter of many commodities. So that's going to have a negative impact on growth and
inflation and likely affect negatively spending plans of corporations and individuals.
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[Increased inflation risk]
As a result of recent events and the risks they imply for commodity prices and confidence, our
previous growth and inflation forecasts will have to be adjusted. Probably growth will be
adjusted downwards and inflation will be adjusted upwards. So given the starting economic
landscape, the upside risk to inflation outlook is arguably the most relevant for policymakers. So
what we're going to be watching from here also is policymakers’ reaction, and so far they have
demonstrated that they are continuing on their policy renormalization. So the Bank of Canada
recently raised interest rates and gave indications that they would continue to raise interest
rates and so did the Federal Reserve indicated that they will continue or they would start
removing their accommodations.
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[Financial market implications]
The rise in geopolitical events risk confounds what we already see as a complex outlook for the
financial markets. Given the pandemic, given relatively high and broadening inflation, developed
markets, central banks need to remove some of their massive liquidity stimulus since they
injected that since March 2020 after the pandemic. So all this means that in the short term, it
seems likely that we'll experience continued market volatility and a lack of direction in both
equity and fixed income markets as investors continue to evaluate the full impact of the
geopolitical situation. Thereafter I think if we try to lift our eyes on the horizon, a world of higher
commodity prices and receding policy stimulus from central banks could generate a more
pronounced economic slowdown than what we initially expected at the start of the year. This
represents an additional near-term challenge to risky assets, including equity markets, which
had started the year in 2022 at somewhat elevated valuation levels for at least some markets.
Still, I think we do need to keep our eyes on the horizon. Already, some equity markets are in
bear market territory. That creates opportunities, once geopolitical events will calm down.
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[Investor outlook]
Well-diversified portfolios, I think, comprising of government bonds, stable paying dividend
stocks, gold and other commodities in the current environment, as well as cash and some safe
haven currencies should provide more stability to a global portfolio. --So that's number one.
Again, to balance your portfolio with non risky and risky assets is always helpful. And finally,
given the uncertainty, resisting the urge to do something I think is often better than reacting to
daily events that can change on a dime given the current situation. So I think that's another
element that sometimes we feel we need to do something and sometimes not doing anything is
the best thing.
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[Canadian assets]
The prospects for Canadian assets is actually relatively favourable. Canada is very far away
from this whole situation. Exposure to Russia is very low. Yet we are an exporter of commodity.
Our trade balance will benefit from these high commodity prices. Our equity market index has a
favorable composition with high-dividend-paying stocks, energy stocks and commodity stocks in
the index. That's also a favorable composition for our equity markets. And our equity market has
performed relatively well and has outperformed. And our Canadian bonds - Canadian
government bonds - are of highest quality and can be attractive for foreign investors in this type
of environment. And finally, our currency is somewhat undervalued and is supported to a certain
degree by higher commodity prices. So all in all, many mandates that we have, that we run, we
remain overweight Canadian equities, and we have a good portion of our balanced portfolios in
Canadian assets. so that brings some stability in this difficult environment.
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[This video is provided for general informational purposes only and does not constitute financial,
investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or
sell any securities referred to. Individual circumstances and current events are critical to sound
investment planning; anyone wishing to act on this document should consult with his or her
advisor. All opinions and estimates expressed in this document are as of the date of publication
unless otherwise indicated and are subject to change.
The CIBC logo is a trademark of Canadian Imperial Bank of Commerce (CIBC), used under
license. The material and/or its contents may not be reproduced without the express written
consent of CIBC Asset Management Inc. Certain information that we have provided to you may
constitute “forward-looking” statements.
These statements involve known and unknown risks, uncertainties and other factors that may
cause the actual results or achievements to be materially different than the results, performance
or achievements expressed or implied in the forward-looking statements.]
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[The CIBC logo is a trademark of CIBC, used under license.]
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How to stay balanced in volatile markets
How to Stay Balanced in Volatile Markets
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[Onscreen Text: Craig Jerusalim, Portfolio Manager, Canadian Equities, CIBC Asset Management]
Craig: Markets are really experiencing some unprecedented moves right now. The drop in oil, 20 to 30 percent in one day. The drawdown in the broad indices is really unprecedented in the scale and the speed of which it's dropped. And the problem right now is no one can give definitive answers, definitive answers of when the Coronavirus is going to be cured or when the imminent recession is going to come or not come. And it's really that fear of the unknown that is causing some market participants to panic. And there's no answer that I can give to fully allay fears of an imminent V-shaped bounce back, because no one knows for certain that that's what's going to happen.
Advice for clients really has to be in line with what you feel comfortable, what risk you feel comfortable taking on. However, don't try and time the market. All the evidence we've seen over history is that investors are really poor at getting out as the market is dropping and then getting back in when the market's rebounding. There's really only one mistake an investor can make throughout the history of investing, and that's selling at the bottom. If you miss just the 20 best days over the past 20 years, you would've wiped out 100 percent of your returns over that time period for the TSX. So instead, be comfortable with your asset allocation and be able to perhaps either dollar cost average in or dollar cost average out to help alleviate some of those fears.
[Onscreen Title: The importance of long-term investing]
Craig: Today's market price is probably not the low, tomorrow's low probably won't be the cycle low either, but we don't know when that rebound is going to happen. And there are a number of differences between the situation today and the situation in 2009, for example, during the financial crisis.
Today, there's a factor, the Coronavirus, that is causing people to just tighten up and cause people to not go out and spend, not travel. And that's causing a short-term demand impact. However, unlike in 2008 and 2009, there's not massive fraud in the system. There's not excesses in valuations or any bubbles forming. The U.S. consumer, for example, is much healthier today than they were in 2008. Saving rates are high. Debt service ratios are low. Unemployment is extremely low. So, there's reasons to believe that there's going to be some sort of built up demand that will come back to the market when those fears alleviate. We also know that interest rates are extremely low at all-time record lows and that the federal government is there for monetary and fiscal stimulus, as well as many other countries around the world that are going to be throwing everything they can at this economy to get it moving again. We don't know when that's going to happen, but we know we want to be positioned for it. So, we're not throwing out the babies with the bathwater or using the opportunity to high-grade portfolios to move to the highest quality companies, to be best positioned for that rebound when it happens.
[Onscreen Title: Portfolio positioning]
Craig: There's two sets of assets that we need to think about. The asset where the allocation is a little bit more flexible, where you could raise cash and you can move more defensive. And there's another set of assets that are going to stay fully invested. And that's the money that we're managing for clients, for the money that's staying fully invested in mutual funds, for example, we're not sitting on our hands and doing nothing.
[Onscreen Text: Five indicators we are watching in our portfolios]
Craig: There's five things that we're doing within those funds.
[Onscreen Text: 1. Look at company balance sheets]
Craig: The first is looking at balance sheets. Any company that is at risk in the short term, due to their leverage, is something that needs to be taken out of the portfolios. We have to be invested in the companies that can use this market disruption to their advantage as opposed to it causing risks from an ongoing basis.
[Onscreen Text: 2. Identify potential switch trades]
Craig: The second thing is we're looking for switch trades, which companies with similar exposures are down more than others because right now everything is moving lower. But at different paces. So, we're looking for the switch trades in the portfolio.
[Onscreen Text: 3. Look for overreaction in company shares]
Craig: The third thing is we're looking for companies that have just overreacted: which companies have are discounting a worst case scenario, recession, even though the cash flows are still recurring and ongoing.
Craig: The fourth is we're looking for the opportunities in the companies that have recurring earnings, that have domestic focused earnings, because we think that Canada is going to be less impacted than some other emerging markets around the world. We're looking for the companies that we know where their next dollar is going to come from. Think about all the companies whose bills you receive every month that you're going to continue to pay. Those are the telcos and the utility companies.
Craig: We're starting to sharpen our pencil on those cyclical companies. The companies that are down the most now but are likely to snap back at the time when the stimulus and the recovery begins. We're too early at this stage, but sharpening the pencil and getting ready for that rebound is important.
[Onscreen Text: The views expressed in this video are the personal views of Craig Jerusalim and should not be taken as the views of CIBC Asset Management Inc. This video is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this document should consult with his or her advisor. All opinions and estimates expressed in this document are as of the date of publication unless otherwise indicated, and are subject to change. ®The CIBC logo is a registered trademark of the Canadian Imperial Bank of Commerce (CIBC), used under license. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc. Certain information that we have provided to you may constitute “forward-looking” statements. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or achievements to be materially different than the results, performance or achievements expressed or implied in the forward-looking statements.]