- While the Russian invasion of Ukraine has unnerved financial markets and increased downside risks in the near term, we continue to believe the outlook for economic growth in the U.S. remains on solid footing.
- Market volatility will likely remain heightened as the situation develops and fighting continues in Ukraine, but the impact on U.S. economic growth should be limited unless financial conditions tighten significantly.
- Commodity price increases are the most direct risk, as rising prices of gasoline and other commodity-sensitive consumer goods reduces purchasing power for consumers and businesses. This could result in higher inflation that might linger further into the year than previously expected.
- As such, the Fed will likely stay the course and proceed with plans to raise rates and reduce its balance sheet unless conditions deteriorate significantly and negatively impact the growth outlook.
- Within our portfolios, we are not making any material adjustments to positioning. Financial markets and valuations have adjusted to these risks and uncertainties. We remain overweight credit risk within fixed income portfolios and overweight equities within our balanced portfolios.
In Ukraine, a worst case scenario is playing out with the Russian invasion. Vladimir Putin’s intended outcome and end goals are uncertain at this point, but best indications are that Russia is seeking to knock out Ukrainian military capabilities and potentially set up a friendly regime in Kyiv (Putin has declared this to be the goal, and actions on ground support this). The full scale of Western response to Russian aggression is not yet available, but tighter sanction packages are being implemented by a host of nations.
Fixed Income ViewpointThe Fort Washington fixed income team has not made any material portfolio changes in response to the conflict. Changes could occur if valuations would adjust to levels that provide for more compelling risk/adjusted returns, and the team would look to add risk in that environment, barring any material deterioration in our economic outlook.
A few fixed income strategies do have modest Ukraine exposure through holdings in sovereigns, quasi-sovereigns, and corporates, but the impact to overall performance should be limited. At current levels and exposure, we continue to hold these securities. If/when hostilities cease, potential outcomes range from preservation of the existing Ukrainian government to a Russian installed regime or Russian occupation, or something in-between. Risks are significant especially relating to potential for prolonged conflict, damage caused by conflict, and potential sanctions in the case of Russian success.