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.]

.

Will Market Volatility Continue?

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[Michael Sager, Executive Director, Multi-Asset and Currency Management

CIBC Asset Management]

I think market volatility is being driven by a number of factors.

[A Russian government building. The Ukrainian flag flying over Kiev.]

The first one, obviously, is the geopolitical situation in Europe with Russia's invasion of Ukraine.

[The EU Central Bank building. The U.S. Federal Reserve building.]

In a more underlying sense, though, we can think back to the pivot by developed market central

banks that has occurred over the last few months, in terms of their policy priorities and how

they're thinking about inflation.

[People wearing masks in public.]

In addition, the third thing that's been around for a little bit longer, of course, is the pandemic,

which has really impacted behaviour and markets.

[Sources of volatility

• Geopolitics

• Policy

• Pandemic]

So, geopolitics, policy, pandemic would be the three sources of relatively heightened volatility at

the moment.

[Volatility - historical context]

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In the grand sweep of history, if you go back and you include some of the big volatility events:

[The Wall Street sign. Market Data.]

2008 with the global financial crisis, or March 2020 with the onset of the pandemic in North

America, volatility in financial markets was much, much higher, at least for a time than we're

currently witnessing. So, I would characterize volatility in the markets at the moment as

elevated, but certainly not exceptional on the high side.

[Volatility outlook]

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I think the most likely case is that volatility stays a little bit elevated, relative to what we're used

to, on average over the last several years. So, there's a number of reasons.

[1. Geopolitics]

[A military checkpoint. Skyscrapers. Market Data]

One, if you look at the history of geopolitical events from the perspective of their impact on

financial markets, it tends to be relatively short lived. That source of volatility might be around

for several weeks yet, even perhaps a couple of months, but after that, that source of volatility

wanes.

[2. Policy]

[A politician’s hands surrounded by microphones.]

More relevant is the policy source of risk and volatility. So, two aspects there. One; clearly, the

pivot to trying to bring inflation back down to more tolerable rates is generating volatility.

[The U.S. Federal Reserve building. The Bank of Canada building.]

And I think that that battle between inflation and central banks is going to last for a little bit

longer yet. So that means that that source of inflation will last for a little bit longer.

[3. Pandemic]

[A woman wearing a mask. The EU Central Bank building.]

Since the onset of the pandemic in North America in March 2020, central banks bought a huge

volume of assets and that buying really dampened down market volatility. As part of their efforts

to get inflation firmly under control, they will be, first of all, reducing the extent of their asset

purchases.

[Market Data on monitors.]

And then actually selling off the assets on their balance sheets. And so that will almost be a

reverse impact. So, whereas the purchases dampened market volatility, that dampening impact

won't be as strong. That in itself will lead to a little bit higher volatility on average.

[Conclusion]

When thinking about periods of volatility, our best counsel is to as best one can, look through

them, continue to focus on long-term fundamentals, ensure that your portfolio is set up to be

consistent with your long-term goals and objectives because it's very easy to get swept up in the

current spike in volatility, the current event risk that is driving that spike. But often times those

spikes are relatively short lived. And then afterwards, what we're left with is a re-engagement

with long-term fundamentals. So, I think best counsel is to wherever possible, look through the

short-term focus on those long-term fundamentals.

[Soft music]

[The views expressed in this video are the personal views of Michael Sager 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 video should consult with his or her advisor. All opinions

and estimates expressed in this video are as of the date of publication unless otherwise

indicated, and are subject to change.™The CIBC Asset Management and the CIBC logo are

trademarks 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 “forwardlooking”

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.]

Canadian housing – Logic behind the madness? [Upbeat music] [CIBC logo] [Canadian housing – Logic behind the madness?] [Benjamin Tal Managing Director and Deputy Chief Economist CIBC Capital Markets] The big question is to what extent the Canadian housing market will continue with this kind of very strong activity? And the first question is why it's happening in the middle of a pandemic? And the answer, of course, is the asymmetrical nature of this recession, with all the jobs lost being low paying, rentals and therefore homebuyers found themselves in a position - and that's very important - that they were able to take advantage of what the recession can give you, namely low interest rates without the cost of a recession, vis-a-vis a broadly based increase in the unemployment rate. That's something that we have never seen before and led to this surge in home buying. [Urban cityscapes] Today, what we are seeing is another factor. Namely, interest rates are starting to rise. People are tweeting about the Bank of Canada moving. Bond yields are starting to move. Therefore, people are sensing that the window is closing and there is this sense of urgency to get into the market and basically, buy this house before it's too late. So, we are borrowing activity from the future. [Aerial shot of a sprawling suburb. A bungalow with a ‘for sale’ sign in front of it. Aerial shot of a sprawling suburb in winter.] And that's exactly why we see activity still accelerating at this stage of the game. That will slow down in the second half of the year as interest rates start rising and the future basically has arrived. [Upbeat music] [The impact of gifting] Now, it doesn't mean that the housing market will derail. The opposite is the case. The fundamentals of the housing market are still very strong, and two things are happening that we have to understand. One is gifting. We have a situation in which one third – one third! – of homebuyers now are getting a significant gift from a family. [Vancouver suburbs and city skyline. Aerial shot of a subdivision.] The average gift is about $80,000. In places like Toronto, Vancouver, it's close to two hundred thousand. And mover-uppers, another 10 percent of people who get a gift, in places like Vancouver, the average gift is three hundred and forty thousand. That's a big gift. This is a major factor impacting the housing market, and if you are interested in understanding the housing market, that's part of it. [Upbeat music] [The impact of immigration] During COVID 2021, last year, we got four hundred and ten thousand new immigrants. That's a huge wave of increase in activity. And next year, we will get more as the quota is rising, which means that this demand will continue to influence the market. [A jet descending onto a landing strip. A timelapse of a jet being filled with passengers. A construction site. A worker making measurements on a construction site.] And we have still very limited supply, with inventories at record low. For the first time, governments at all levels are admitting that supply is the issue because until now we were using demand tools to fight supply issues. For the first time, governments are suggesting that they have to do something about supply. This will take time, but at least it's a step in the right direction. So, at this point, we might see the market still accelerating in the next few months, maybe slow down in the second half of the year as rates start rising, but it will not be derailed. The only thing that can lead to a major adjustment in the market at this point is a monetary policy error in which the central bank, the Bank of Canada, will start raising interest rates way too quickly. That can shock the market. I believe that will not happen, but that's a risk that is facing the housing market at this point. [Upbeat music] [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 video 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). The material and/or its contents may not be reproduced without the express written consent of CIBC.] [CIBC logo] [The CIBC logo is a trademark of CIBC, used under license.]