Ukraine crisis – what investors need to know
Luc de la Durantaye discusses how a continued lack of direction is likely for both equity and fixed income markets.
Ukraine crisis – What investors need to know
[Ukraine crisis – What investors need to know]
[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.
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.
[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.
[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.
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.
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.
[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.]
[The CIBC logo is a trademark of CIBC, used under license.]
Will market volatility continue?
Spurred by geopolitics, the pandemic and global central banks’ policies, Michael Sager characterizes current “volatility in the markets as elevated".
Will Market Volatility Continue?
[Michael Sager, Vice President, Multi-Asset and Currency
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
So, geopolitics, policy, pandemic would be the three sources of relatively heightened volatility at
[Volatility - historical context]
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.
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.
[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
[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.
[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
[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.
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.
[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
[The CIBC logo is a trademark of CIBC, used under license.]
Logic behind the madness?
Low interest rates and strong demand continue to drive Canada’s hot housing market. Could rising rates derail real estate in 2022?
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.]