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Asset allocation monthly – Strong inflation currents

Maya Bhandari
Daniel Morris

In this article:

    Russia’s invasion of Ukraine and heightened geopolitical tensions have led to steep falls in local assets, sent commodity prices soaring and led many investors to shift to a risk-off stance.  

    In our multi-asset portfolios, we have reduced our tactical risk positions in European and emerging market equities to neutral and moved into cash, while keeping the option open for further reductions should the situation deteriorate.

    We increased our short duration position in US Treasuries given our cautious view on core bonds in the face of strong domestic inflation pressures. Longer maturity bond yields appear much too low to us even as geopolitical risks have pushed real rates lower.

    Longer term, we question the role of government bonds as a source of diversification for multi-asset portfolios. Yields at or around 50-year lows offer little as a protective buffer. All the ingredients for higher yields are here including acute labour shortages and an oil price shock on top of the inflation generated from the pandemic.

    It is not clear that it is time to buy broader equity risk; further escalation of the conflict will impact earnings considerably, with Europe hardest hit. The longer the conflict continues, the greater the downside risk to growth and earnings. We expect equity analysts to begin to incorporate a more downbeat growth outlook into their forecasts.

    Declines in equities this year have primarily been driven by normalising valuations. We will need a stabilisation of the geopolitical situation and a clearer assessment of the earnings outlook before we can determine whether valuations are truly attractive.


    Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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