indicatorMarket Commentary

ATBIM update on Ukraine

By ATB Investment Management Inc. 28 February 2022 9 min read

Along with the rest of the world, we watched the news of Russia’s invasion of Ukraine on Feb. 24 in shock and disbelief. While we now try to digest what’s happening and what it means for markets, the ATB Investment Management (ATBIM) team is first and foremost thinking of the people in Ukraine, and their loved ones here in Canada and within the ATB community. 

Geopolitical events such as this tend to drive up short-term volatility in capital markets, but typically do not have lasting effects. It is challenging to predict the impact, if any, this crisis could have on the broader economy. Instead of trying to predict, we have gathered comments from the portfolio managers at ATBIM and our sub-advisors to hear their thoughts and how a conflict of this magnitude impacts their process of building resilient portfolios.

 

ATBIM Portfolio Management team

Markets, as we have observed time and again, don’t like uncertainty, whether it’s the COVID-19 pandemic, the spectre of rising inflation, central bank policy, or interest rate hikes, to name a few recent examples. While we don’t know the extent of Russia’s intentions, the current conflict has increased uncertainty around the world, with spillover effects in capital markets.

Emotions always rule in the short term when looking at the markets. The invasion creates fear and uncertainty, and volatility follows. As a team, we look beyond the daily market movement as a barometer—for example how much the Dow is up or down for the day—and remember that beneath those numbers, we are invested in a wide range of different companies, which makes for a resilient portfolio. Taking a step back, will Russia invading Ukraine have a sizable impact on these companies over the longer term? Individuals will still be buying groceries, filling up with gas, paying their cell phone and internet bill, using their bank and credit cards, paying for utilities, shopping at physical and online retailers. Without a doubt, wars have the potential to create imbalances, but overall, markets are underpinned by earnings and growth of earnings in the long term. Wars, even the worst of them, in aggregate globally haven’t tended to have a pronounced impact on markets past short-term volatility. 

Aside from a recent increase in volatility in equity markets, we have seen higher prices for energy and other commodities such as gold. Energy is impacted due to Russia being a leading exporter of oil and gas. The longer-term effects remain to be seen — with the longevity of the conflict being one major factor.

With respect to direct exposure to Russian securities in our portfolios, as of the time of this writing on February 28th, there are two stock holdings with exposure to, or domiciled in, Russia. These are TCS Group Holding PLC, held through the Mawer International Fund (addressed by Mawer in its section below), and Raspadskaya OJSC (RASP), through the BMO MSCI EAFE Index ETF1. RASP represents a 0.005% position weight in the BMO MSCI EAFE ETF, and it is expected the position will be sold if able on the next monthly rebalancing. Both security weights combined as of the start of the day amounted to roughly 0.05% of the CompassTM Maximum Growth Portfolio, and 0.18% for the ATBIS International Equity Pool. The other Compass Funds, and other ATBIS Pools, have less or no exposure respectively.

In summary, whatever the outcome of the Ukraine conflict, it’s prudent to remain diversified in our investment portfolios. Having a mix of not only different asset classes, but just as importantly, geographical diversification, means we are well-positioned over the longer term.

Canso Investment Counsel Ltd. 

Fixed income sub-advisor for ATBIM

The tragedy unfolding in Ukraine has, at least up until now, had a limited impact on the fixed income markets. The initial shock of Russia’s attack on Ukraine led to a sell-off in equity markets, drop in yields, surge in oil and other commodity prices and a flight to quality. Markets quickly recovered lost ground but it is expected that volatility will continue as the invasion continues. The United States and its allies responded quickly by imposing economic sanctions on Russia, but stopped short of implementing everything possible.

Rather than focus specifically on Ukraine, the market continues to focus on the anticipated upcoming rate increases by the Federal Reserve and the Bank of Canada. The probability rate increases will bring inflation back to the 2% target and the impact those same rate increases will have on longer term yields.

While we see the current situation in Eastern Europe having dire humanitarian consequences it is unlikely to have a significant impact on the global economy. The situation could further increase inflation in some regions from interruptions in goods coming from Russia and Ukraine. At Canso we are focused on managing diversified portfolios of primarily North American credits. Our research is focused on bottom up security selection and with a review of our current holdings we do not see a significant negative impact on the businesses represented in our portfolios. Canso’s bias continues to be to move gradually up in credit quality. It is important to emphasize Canso does not invest in emerging markets so there are no Russian or Ukrainian domiciled companies held within the Canso managed portfolios.

Cardinal Capital Management

Equity mandates managed for ATBIM: Canadian large-cap

The Russian invasion of Ukraine contributed to volatility across equity, commodity, and fixed income markets. On Thursday, we saw significant swings including in the price of WTI oil with the commodity climbing over 9% to over $100/barrel at one point before ultimately ending up 1%. The NASDAQ was down over 3% before reversing course and then ultimately finished up over 3% on the day. The S&P/TSX declined 2% before ending up slightly in positive territory.

The extent and duration of the conflict along with the humanitarian cost are unknown at this time. However, market weakness due to geopolitical conflicts, such as the 1991 Gulf War or North Korea invasion of South Korea in 1950, historically tends to be short-lived. Markets typically recover quickly as the news is digested and uncertainty no longer hangs overhead. We may see spill over into a sustained rise in commodity prices such as energy, agriculture, and materials. However, this should not completely derail global growth. 

Geopolitical events undoubtedly cause anxiety for investors. History shows that the best approach is to stick with a well thought-out investment plan and not to make abrupt changes. Maintaining a portfolio of high-quality companies that have succeeded through even tough events of decades past has proven its worth over the long-run.

Cidel Asset Management Inc.

Equity mandates managed for ATBIM: Canadian large-cap 

Market turmoil is upsetting for everyone. As the saying goes “when the market is moving up, you always feel like you have too little exposure and when the market goes down, you feel like you have too much exposure”. The trick is to set emotions aside and refrain from making any dramatic moves during these volatile times. As tempting as it may seem, this is not the environment in which to make dramatic changes to one’s asset allocation. If there are particularly compelling investment opportunities, you can be assured that we will bring them to the forefront as we did in 2020 & 2021. We remain steadfast in our belief that now is not the time to tilt aggressively away from your long-term asset mix.

Mawer Investment Management Inc. 

Equity mandates managed for ATBIM: Canadian large-cap, Canadian small-cap, US Equity, International Equity, Global small-cap

What’s the risk?

  • In the immediate term, the impact of Russia's invasion of Ukraine and its repercussions. This includes the risk of human death and suffering, sanctions on Russian entities, and the potential for even greater geopolitical tension and conflict with the West.
  • Russian equity markets have sold off significantly over the past few days and months, as has the Russian ruble. Global equity markets are broadly lower this year.

What’s our exposure?

  • Very modest. Coming into February, only the International Equity Fund had investments in Russia, a 0.6% position in TCS Group, a digital bank focused on individuals and not involved with the government, either as a shareholder or lender to SOEs. (this weight is obviously much lower today)
  • I wouldn’t point to any significant indirect exposure either across our portfolios, as defined by revenue exposure. For example, businesses and individuals in Russia obviously use Microsoft products, but they are an extremely small portion of Microsoft’s global revenues.
    • Global small cap has a few companies with more exposure (e.g. Slovenian generic pharma company Krka derives 30% of sales from Ukraine and Russia; Norwegian salmon fishing company Bakkafrost has about 15% of its sales to Russia). Both are sub-2% weights in the Global small cap portfolio.

How are we mitigating these risks?

  • We eliminated our position in Sberbank, the Russia’s largest lender, in late January within the International Equity portfolio, due to the risks of sanctions (which have indeed materialized)
  • Recognizing the heightened macro/political risk in Russia, we are managing position sizing in those companies we do own, along with the aggregate exposure to Russia / Eastern Europe, and sticking with companies where the risks of sanctions may be less acute while recognizing that they may face significant volatility. TCS, for example, is prudently managed, does not lend to government entities, and has weathered past storms including the global financial crisis and the 2014 Russian sanctions. It may even gain market share if other banks are weakened.

It’s probably the 3rd and 4th order effects that will be more meaningful, but also much more difficult to predict. The COVID pandemic is a good example. At the risk of minimizing the toll on human health and the millions of deaths that COVID has produced … from an investment perspective, looking back over the past 2 years, the more important risks associated with COVID were less about virology, deaths and health, but more about supply chain impacts, work-from-home shifts, monetary policy, inflationary pressures, etc.

It may be the same re: Russia and Ukraine. Of course, of primary concern is the very real suffering associated with a war in Ukraine (or, and let’s hope this won’t be the case, but one that is wider spread). But the bigger indirect investment exposures may similarly be harder to predict ex ante and wider-ranging than simply where companies are headquartered or do business: e.g. the impact on commodity markets, inflation, supply chains, the potential for greater geopolitical conflict with the West, whether this emboldens China with respect to Taiwan, etc.

As usual, we don’t think we’re going to be able to predict something that everyone else will miss. And, as always with uncertainty, we continue to focus on being prepared, to understand what we own, and to be diversified.

None of us at ATBIM or amongst our sub-advisors can say with certainty what might unfold as markets continue to react to the Russian invasion, but we all agree that the lasting impacts to well-built and diversified portfolios are likely minimal. While we are confident our portfolios can handle volatility, we of course hope for a quick resolution to the conflict, and continue to hold the people of Ukraine in our hearts.

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