Exposure rates of the Dorval Asset Management Range – 11th March 2022
Talks between Russia and Ukraine, combined with fluctuations on the commodities markets (cf. chart 1), are keeping investors on tenterhooks, while interest rate trends are raising questions to boot.
To-ing and fro-ing on commodities prices
price trends YTD, in %
Natural gas (Europe) / Wheat / Oil (Brent) / Natural gas (US)
Economists and analysts have started downgrading their growth projections for the quarters ahead, particularly in Europe. With oil at $90/bbl when the model was developed, the European Central Bank downgraded its 2022 euro area growth projections from 4.2% to 3.7% on Thursday March 10th, pointing to a moderate shock. However, the central bank also set out an alternative so-called adverse scenario, taking on board stricter sanctions, including persistent cuts in Russian gas supplies to Europe affecting manufacturing output. This adverse scenario would cut 2022 growth back to 2.5%, with 2.7% in 2023. With uncertainties still running high, we will refrain from setting out a detailed scenario for now. The commodities market embodies the main fallout from the crisis and remains extremely volatile, while the European equity market has quite logically offered a mirror image of these fluctuations in commodities since the start of Russia’s invasion (cf. chart 2).
Share prices offer mirror image of commodities market
GSCI composite commodities index (LHS) / Euro Stoxx 50 (RHS)
The shock from the crisis in Ukraine is asymmetrical for both economies and companies. Growth projections for both the US and China are less affected than figures for Europe. Meanwhile, the impact is not just considerable for Wall Street, but also European companies as they often have very high exposure to these markets: it is worth remembering that listed companies in Europe generate on average just half their revenues on their home continent. However, European exporting companies could be affected if supply chain disruptions were to materialize, whether for natural gas or other aspects.
The shock is also extremely uneven for the equity markets. After a clear underperformance in January, Wall Street and European visible growth stock prices held up well amidst the shock from Ukraine, while European cyclical stocks naturally slid after being flavor of the month in January (cf. chart 3). All in all, the two share universes – visible growth stocks and cyclical shares – have both been hit by a significant de-rating year-to-date, making the equity asset class more attractive.
Two successive bear markets since the start of the year: growth stocks then cyclicals
Goldman Sachs European baskets, performance since before the invasion
Invasion of Ukraine / Euro Stoxx 50 / Cyclicals (European Union) / S&P 500 / Visible growth (European Union)
Looking beyond the events in Ukraine, as well as moves to cover short positions witnessed over recent days, we will need to keep a close eye on the US economy’s resilience capabilities in the face of even higher inflation, and monitor market behavior in response to rising interest rates. While the wide equities/bonds valuation gap very clearly favors equities, the central banks’ repeated aim to put an end to ultra-accommodative policies could trigger fresh intermittent disruption across all markets.
Against this very volatile backdrop, our equity market exposure remains moderate on average, although we stand poised to adapt to any geopolitical changes and market moves. In our international funds, we maintain the energy transition theme, which is bolstered by the crisis, and keep our bond duration at virtually zero.