February 2022 – 30 years of globalization and progress shattered by the invasion of Ukraine

SFRR ends February at -5.91% (-16.13% YTD), SFPG at –5.87% (-20.58% YTD) and SFQS at -7.79% (-14.25% YTD), while the MSCI World reports MTD returns of -2.53% in EUR (-6.36% YTD in EUR).

February 24 will go down in history because of the repercussions it will have on international relations over the next decade. Vladimir Putin decides to invade Ukraine to stop it from joining the NATO and to take control over the region, squandering all the efforts for the integration of Russia’s economy with the western world he had been promoting in his first two mandates. Ukraine had already initiated its request to join the NATO in 2008; it is a lengthy process, some stages of which still had to be completed, such as a referendum to validate its nomination. Since the USSR’s disintegration in ’91, the commercial ties between the ex-soviet republics and western countries have strengthened so much it was believed there was no going back. Burning those bridges will seriously affect Russian economy and will also impact Europe, which can end up in a recession if the war lasts long. Although the US also has important challenges to meet, such as controlling inflation, fuelled by the commodities price shock, it also has many more resources to keep its economy on course and will be much more resilient. Having oil and food sector commodities makes the US much less dependent of external sources. Although oil price shocks triggered recessions in the past, and may well do so now, intervention from the OPEC is also possible. The question is whether the US’ strong growth coupled with the lower impact of commodity prices in its GDP compared to other periods will deflect the crisis, resulting only in a slower growth rate, or if the US will indeed slip into recession. The situation the Fed must deal with is quite complex: this conflict arises when it doesn’t have much scope for economic stimulation, as steps have actually been taken to cool it down. Since the Fed’s priority has traditionally been growth and employment, if growth is seriously compromised the Fed will most likely become more sensitive to the conflict, although it will not renounce to its objective of controlling inflation and interest rate hikes are to be expected. In any case, it seems obvious that conditions in the US will be much better than in Europe in the short term.

Since the invasion, we’ve underpinned our strategic pillars:

  1. Greater concentration in the US, both in funds and in diversified portfolios
  2. Increased hedging in the Sigma Real Return and Prudent Growth funds
  3. Greater concentration in USD and short Eurostoxx 50, which will gradually be decreased
  4. Higher levels of cash in funds and portfolios (up to 25% in Real Return, 10% in Prudent Growth and 8% in Quality Stocks as of March 4), and additional liquidity in managed portfolios depending on the investor’s profile and positioning

Geopolitical events, particularly military events, are tough to manage: uncertainty increases and rebounds can follow sharp falls. To lessen its impact on our funds and portfolios, we’ve adopted a more defensive stance, which we will be gradually reversed as uncertainties are cleared. We have not attempted to take up a directional stance towards the war by buying oil, gold, and similar assets –although it may have been beneficial to do so– considering their high volatility and the losses such holdings can convey when conflicts are solved. Instead, we’ve increased index hedging which, even if it can also subtract from returns in a rebound, is more correlated to our equity holdings, that have an enormous revaluation potential at current levels and should be viewed as an opportunity to purchase rather than an opportunity to sell. Some sectors have fallen as much as during the Covid, dragged by a rotation towards energy and financials, but such movements tend to reverse over time. Even though our market correlation will decrease over March, we will resume a more directional positioning once conditions improve.

The most worrying aspect of the current geopolitical crisis is the lack of unity with the OPEC dismissing the US’ request to increase oil production, and China and India’s permissiveness with Russia. Both Saudi Arabia and China have pending accounts with the US; the OPEC for grievances against Trump’s government when oil prices fell below $20 and futures to -40, in April 2020. At the time, they were unable to agree on a production cutback, mostly because Trump felt it would not benefit US consumers, and could, on the contrary, harm Russia. On the other hand, China has not yet forgotten the sanctions and limitations imposed by the US as a part of its protectionist measures. Trump began a dangerous anti-globalization process (he even suggested exiting the NATO), and its last throes are limiting the support from the aggrieved ones. The silver lining of the invasion is that, going forward, it will reunite the western world – highly fragmented in bull markets– and could encourage China and the OPEC to increase globalization if they are able to keep calm and look out for their own economies while cooperating in the reconstruction of global economy. In the short term, it seems that China and India will take advantage of Russia’s collapse buying its oil, gas and gold reserves at a discount. However, the gains they would bring in from a normalization of trade relations with the western world would be considerably higher. Let’s hope reason prevails.