Portfolio Changes as a Result of the Conflict in UkraineMarch 4, 2022
Over the previous two weeks, we have watched Russia launch a full-scale invasion of Ukraine. We have researched the many potential reasons why Putin is choosing to do this, but for whatever reason, it is evident this invasion has taken a major turn in severity closer to a full-scale humanitarian crisis on the Ukrainian people. This became abundantly clear as Russia no longer shows restraint on attacking Ukrainian civilians – something Putin promised multiple world leaders would not happen. The severity of this conflict has left us in disbelief – both in solidarity for the people of Ukraine and their future, and in the economic toll Russia is willing to put their people through as a result.
Our Portfolio Management Committee (PMC) strives to prevent making investment decisions in client portfolios based on fear or emotion. Instead, we try to determine the long-term effects on financial markets because of these events. We believe long-term views based on objective information and a risk-first mindset work out much better for client portfolios than attempting to make short-term investment decisions on imperfect knowledge for events where nobody knows the final outcome. Going into 2022, our PMC team had begun reassessing the risk that was being priced into financial markets. We believed economic growth would begin to slow, monetary policy would become more restrictive, and inflation would remain high but move lower in the pace of price increases. After the last few weeks, our viewpoints haven’t necessarily changed, but have been amplified by what we believe the long-term effects on this war will be on financial markets. We still believe economic growth will be slower and the current conflict could exacerbate this trend. We believe inflation will remain elevated as major energy and agricultural supply chains are further disrupted, and uncertainty is also being priced into monetary policy expectations. All these views still culminate in the idea we are in the late stage of the current economic cycle.
These viewpoints have effects on portfolios. For these reasons, we want our clients to be aware we are currently implementing changes to portfolio allocations. One of our major tilts going into the year has been to overweight international equities relative to domestic. This was predicated on a generational valuation gap between international and domestic stocks. While this valuation gap continues to exist, we want to be more selective going forward in our international exposure as we believe the European Union will be more adversely affected by the ongoing conflict.
The EU is Russia’s main trade partner in six out of their eight major traded goods. Additionally, the EU has a high exposure to the financial crisis Russia will experience. We trimmed our international-focused equities and are directing the proceeds toward lower risk and higher quality equity securities that are more focused on domestic and international exposure outside of the EU. Secondly, because of our high conviction we are in a late cycle, we divested of REIT exposure. Publicly traded REITs tend to do very well in environments when the economy is growing, inflation is moving higher, and credit is cheap. Two out of these three factors are moving in a less favorable direction for REITs, so we believe we can find opportunity elsewhere. We are comfortable holding the proceeds from this sell in a short-term cash position as we assess what opportunities currently best fit our forward-looking investment thesis. Overall, we continue to move forward in a risk-first mindset regarding our outlook for financial markets, and also plan to continue to take a lower risk approach moving forward.
We believe making investment decisions on long-term ideas will help provide exposure on the upside to favorable trends, but more importantly provide downside protection to client portfolios. We continue to pray the current conflict between Russia and Ukraine moves towards a peaceful resolution, and that the people of Ukraine find justice and relief.
Your Acumen Team
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