The Point

Be ready for a Russian default as sanctions bite

Few investors would take issue with global sanctions aimed at limiting the terrible human toll of Russia’s invasion of Ukraine.

It’s accepted that the financial implications will impact markets around the world. But what does it mean in terms of asset allocation?

“There is an increasing chance that Russia might default,” says Oliver Ge, a portfolio analyst with Pendal’s Income and Fixed Interest team.

“Russia has about $US640 billion of reserves of which $US400 billion is frozen in central banks around the world. On conservative estimates it costs about $US1 billion a day to run the war, so the impact to Russian coffers is material.

“The message to advisers is that if you were told at the start of the year that you’d get 5 to 7 per cent growth, that’s not going to play out in the current state of affairs.

“So, you should be very wary about holding growth assets and potentially think about some rotation to bonds. Bonds will keep paying,” he says.

“It shouldn’t be a massive rotation, but investors should be more mindful around the expectations of growth assets.”

Crispin Murray’s weekly ASX outlook

Here are the main factors driving the ASX this week according to our head of equities Crispin Murray. Reported by portfolio specialist Chris Adams.

RUSSIA’S invasion of Ukraine is creating second-order effects which the market is struggling to read, leading to dislocations.

We can see two ends of the spectrum in commodities which are “melting up” and European equities (banks in particular) which are plunging.

The markets are facing a four-way collision: the pandemic, a geopolitical crisis, an interest rate tightening cycle and an inflation shock. This is a unique combination.

Historically a geopolitical crisis such as Ukraine and the resulting supply side shock would be partly managed through a reduction in interest rates — as was the 1998 Russian default.

Tim Hext: Is March the month for hawkish hikes?

Our head of government bond strategies Tim Hext turned a few heads recently when he spoke of a “hawkish hike”.

Aren’t all hikes by definition hawkish, a few readers asked.

“They are,” says Tim. “But the accompanying statement is a chance to influence expectations of future hikes. This is especially so in countries where longer-term fixed rate home loans are predominant – no point hiking and seeing them go nowhere.

“We expect the US Fed to do this in their March hike, possibly pushing up the terminal level of rates as well. This will not be bond friendly.”

In Australia the RBA would be “extremely happy if by the end of 2022 inflation is at 3.25%, unemployment sub 4%, wages 3.5%, equities 10% lower, 10-year bonds 2.75% and cash rates 1%”, says Tim.

“It is not the RBA’s job to make sure superannuation balances have positive performance in any given year. Or to protect house prices. Given the massive rises in 2021 a negative year for assets is not a major setback. A year where labour outperforms capital is long overdue.

“Of course the Ukraine disaster will have an impact. But prospects of higher inflation will mean the Fed will need to get on with its hiking path, even if near-term risk markets are unsettled.”

Crispin Murray’s weekly ASX outlook

Here are the main factors driving the ASX this week according to our head of equities Crispin Murray. Reported by portfolio specialist Chris Adams.

MARKET reaction to Russia’s invasion of Ukraine was more subdued than many would have expected, though there has been underlying volatility.

The S&P500 actually ended up last week, gaining 0.8%. This is possibly because the market had already priced in a high probability of conflict – alongside the underlying issue of higher rates.

Sentiment was cautious as a result. The view that sanctions would not cover key commodities and NATO forces would not engage on the ground tempered perceived near-term impact on the broader global economy.

ESG: Investors are voting for diversity in board elections

Need more evidence that ASX investors are placing greater importance on ESG factors?

A new study from responsible investing leader Regnan finds investors are voting against the election of men to boards that lag on gender diversity targets.

Regnan examined two groups of ASX 300 companies — those with low gender diversity at board level and a smaller group with no female directors at all.

For the low-diversity boards, men up for election or re-election were supported by 93% of votes compared to 98.8% for women. Among companies with no female directors, support for men fell to 88.6%.

“Support for re-election of directors in Australian companies is typically very high,” says Regnan’s head of research Alison George.

“A vote that dips below 95 per cent stands out. While this is a small sample set it’s quite a strong difference. Gender diversity concerns are driving the outcome.”

Crispin Murray’s weekly ASX outlook

Here are the main factors driving the ASX this week according to our head of equities Crispin Murray. Reported by portfolio specialist Chris Adams.

Several themes are emerging from Australia’s reporting season:

The Australian economy is in good shape with a strong outlook

Companies that have been challenged for some time by Covid disruptions are responding well and positively surprising the market

Labour availability and inventory management have been a challenge for some companies

US-based businesses are seeking to put through material price rises