Pension funds and institutional investors are taking decisive measures to readjust exposures in portfolios in reaction to the full-scale invasion of Ukraine by Russian troops.
PensionDanmark has divested $60m (€54m) in Russian government bond holdings, halting investments in Russian government bonds or Russian state-controlled companies.
AkademikerPension has also decided to stop new investments in Russian government bonds and state-owned companies. The decision was taken after Russian President Vladimir Putin recognised the two self-proclaimed republics of Donetsk and Luhansk in the Donbass region in eastern Ukraine, escalating the crisis further to the tipping point of an invasion.
Last month chief executive officer Jens Munch Holst told IPE the scheme would immediately exclude Russian government bonds and shares in Russian state-controlled companies if the country were to invade or attack neighbouring Ukraine.
In Germany, asset manager BayernInvest has today decided to revert the decision taken last week to increase its position in gold, by cashing in returns from the tactical exposure. It had also reduced credit-risk exposure in favour of cash.
BayernInvests remains “positive” on gold while at the same time it continues to recommend overweighting precious metals in portfolios, chief investment officer Daniel Kerbach said.
As a consequence of the invasion, the asset manager has also decided to hedge part of its overweight in equities through Eurostoxx50-Futures, to go back to a “simple overweight of our equity quota”, the CIO added in the firm’s newsletter today.
The asset manager is only overweight emerging markets, particularly in Asia, and recommends a neutral weight in European and US equities. It remains positive on the equity market, expecting double-digit growth this year even though geopolitical tensions are causing strong corrections.
The Stoxx Europe 600 lost up to 4.2% following reports on the invasion, Russia’s Moex index plunged 45%, gold price rose more the 3% and oil prices went up to above $100 a barrel.
Caution at the peak of uncertainty
Johanna Kyrklund, CIO of Schroders, said that with the Russian invasion of Ukraine, markets have moved “a step closer to peak uncertainty and into the realm of actual bad news”. She added that however “this is easier for investors to price, even if the consequences are negative”.
The US, UK and the EU have imposed a first round of sanctions on Russia, and another batch may follow, while Germany is pausing the certification of the Nord Stream 2 pipeline, and “one major source of uncertainty is how the Ukrainians and the Western powers will [further] react”, she added.
The impact of the situation in Ukraine goes beyond emerging markets, with Europe particularly exposed, not least because of the dependence on Russian energy, the CIO argued.
In Europe the inflationary pressures will “mechanically intensify with higher commodity prices”, adding to a risk of stagflation and challenging the action of the European Central Bank, Amundi’s CIO Vincent Mortier, deputy CIO Matteo Germano and Monica Defend, head of the Amundi Institute, said in a paper.
Amundi favours “caution” in asset allocation by reducing credit risk, increasing protection on risk assets, and making tactical readjustment on duration that can play a hedging role in fixed income portfolios, the authors added.
The firm recommends a prudent approach on risk assets calling on investors to pick value equity against credit and focus on liquidity risk with the end of “ultra-easy” monetary policies.
Credit Suisse Investment Committee decided in a special meeting today to keep its asset allocation unchanged, including a neutral allocation to equities, adding that in its portfolio hedge funds have recorded solid returns year-on-year, therefore remaining an important pillar of diversification.
In addition to the risk to the assets most directly affected, a key question for investors is whether this conflict can drive Western economies and thus the global economy into recession, it added.
Credit Suisse can make a change to allocations if it sees assets falling to levels not in line with its risk assessment.