In the previous column we described the complex geopolitical picture and the direction in which it leads. Since then a war has broken out in Ukraine. The war and the geopolitical tensions as a whole are joining the rising interest rates that are expected to occur soon in the US and both together are very burdensome on the capital markets, stocks and bonds alike. This reality will develop over the next year or maybe two years and will require professional, courageous investment advice and management based on many years of experience and professional courage to make unconventional asset management decisions. Experienced hands on the wheel.
The deterioration of the world order has also shaken the capital markets and led the public investment portfolios for the second month in a row with negative results, in every investment profile. Meanwhile, one notable thing is that bond portfolios have fallen more sharply relative to stock portfolios so that the bond portfolio indices have fallen by 1.27% while the stock portfolio indices have fallen by a more moderate rate of only 0.09%. A positive trend in Israel contributed to this moderate decline, in which the indices rose differently from the rest of the world and contributed about 1.55% to portfolios. 1.4% on average. The result as stated is a moderate decrease of 0.1% in the stock portfolio component.
Among the portfolios involved, a portfolio with 20% shares, which exists in many regulated entities such as non-profit organizations, fell in March by 1.03% while a portfolio containing 30% shares fell by 0.92%.
Agio indices are an accepted benchmark for the performance of managed investment portfolios based on data from the leading investment houses in Israel, including Psagot, Altshuler Shaham, Activists, Migdal Capital Markets, Excellence, IBI, Meitav Dash, Harel Financial, Tafnit Discount, UNIQUE , And analyst. The data are obtained from the bodies that manage over 80% of the public’s investment portfolios. The indices built from these data monitor the public ‘aggregate investment portfolio’ and constitute objective benchmarks for comparing the performance and results of investment advisory and management bodies, performance of managed investment portfolios, study funds and more.
The information is plentiful but the conclusions are wrong
Throughout the month, the erosion in the bond channels was higher than the erosion in the stock indices in Israel. This led to sharp declines in the bond portfolio indices and more moderate declines in the stock portfolio indices. As an interpretation of this fact it can be concluded that investors in the markets are more afraid of rising interest rates than of the war and its impact on companies and the world economy. Investors did not expect that war would indeed break out in Ukraine, but that we are in an era without wars and that it is no longer appropriate, that Putin is playing poker and that the West will not let him. These and other allegations led investors to fall asleep and not connect the data and information about what is happening between Russia and Ukraine and the West in order to understand where Putin is headed. This is a big miss not only in Israel, but all over the world and certainly it is a miss by investment managers all over the world, who are committed to being vigilant in light of emerging risks, but have ignored the possibility and its implications for investment portfolios.
The reason for this disregard is very important to understand, as it continues to lead the markets in the dark without seeing the real risk, and the reason is thinking at will. The desire of investors to keep moving forward with the markets prevented them from noticing the possibility that the trend would be halted by a factor like war, a situation that had not existed for almost 30 years. They acted on the hope that the positive and justified atmosphere in light of enormous technological and medical developments and great wealth created in the world, would continue to drive the markets.
Even in the present one can see how this hope brings investors to stand on the starting line and start buying stocks, with every news item on talks or negotiations between Russia and Ukraine. Standing on the starting line stems from the fear of missing the positive reversal, however this is a false hope, since the geopolitical situation is only at the beginning of the escalation process.
In addition, towards the end of the month there was a marked correction in bond portfolios and declines, which were even sharper and even closer to 3%, moderated. Again, this seems to be a wrong conclusion or false hopes of the capital markets.
Stagflation and rising interest rates
Investors hope that the war will bring the governors, led by the Fed, to avoid raising interest rates but keep them low to ease the economies, but the Fed has no choice but to raise interest rates, despite high inflation. He is going to do this next week even though throughout the last two years he has been trying to calm the markets, but in the meantime he has encountered the reality of inflation erupting.
In Israel, too, a clear process has been created that leads to a rise in interest rates. As a result, in Israel as in the world, investors believe that interest rates will not rise because the additional inflation created by the war will slow down the economies and to avoid a recession, interest rates will remain low. 5% in Israel. Reality will oblige them to raise interest rates crying to curb inflation regardless of the source.
And the recession? It may come anyway and so may inflation, but governors simply will have no choice. The economic slowdown that may result from rising input prices, the rise in consumer prices will hurt a very large public of people, who will pay the price. First of all the price of the corona and its financing through money printing, the price of delay with raising interest rates and the price of wars and rising prices of inputs. The harsh economic reality will eventually roll over to households through a slowdown or, God forbid, a recession, when central banks will have little to do other than raise interest rates, as an additional precaution and apparently the war in Europe will not prevent this.
How will the war in Ukraine affect the markets?
The war in Europe is a significant geopolitical event, as it ends an era of peace (in the Western world) and a focus of peoples on development and a quiet and prosperous life. It is the first significant expression of a change in the balance of power and the weakening of NATO and American influence, teaches that the world’s dependence on oil and gas is not over and emphasizes the ideological front line between East and West, between China and the US line of economics and global agenda.
As we estimate in this column over the last period, the geopolitical frictions will erupt in full force in 2022 and that this eruption and especially the events that will follow, will have a negative impact on the economic processes and therefore on the capital markets. The effect may continue for a long time, when in the coming year it will be more pronounced as it is a change that investors and markets will have to get used to – the global order, trade, raw material supply, interest rates, labor market mood and more. All of these will lead to more careful pricing of assets, both in and out of the capital market.
Under this working assumption, it seems that the decline of markets with the outbreak of war in Ukraine – only an initial response. This is a natural response to a stimulus – and although for a few short days it has been replaced by ascents – it marks the direction. In our estimation, the negative effect may be more fundamental and lasting, for several reasons, including additional inflation due to the heaviness of inflation factors, energy prices, metals and food, as well as difficulties in transportation, increased pressure to raise interest rates, although additional inflation does not come from demand. , Difficulties in the banking systems and more.
Of all these, we estimated at the end of the previous year that 2022 would be an inconvenient year for investment management. Its first two months signal that it may indeed be so. Investors’ hopes that the crisis will pass quickly and that the recent declines are a buying opportunity may only increase volatility. In practice, this is a year in which risk is kept lower than normal, despite the fear of being left behind if and when the market abruptly shifts to a positive trend.
The author is the CEO of Agio Risk Management and Financial Decisions. Benchmark indices and other cross-sections can be found on the company’s website. .