The Lookout | Week of February 28, 2022

The Lookout | Week of February 28, 2022

As the market reacts to the recent invasion of Ukraine by Russian forces and subsequent sanctions, our network of investment professionals outlines what they’re watching this week.

Major Market Events:

Tuesday, March 1: Speeches from ECB President Lagarde and Joe Biden; Manufacturing PMI (US, GBP, EUR)

Wednesday, March 2: ADP Nonfarm Employment Change (USD), Fed Chair Powell Testifies, US Crude Oil Inventories, Bank of Canada Interest Rate Decision

Thursday, March 3: Initial Jobless Claims (US), Fed Chair Powell Testifies

Friday, March 4: US Nonfarm Payroll Report/Unemployment Rate

Hunter Frey, Investment Analyst at Catalyst, Rational, and Strategy Shares

• Domestic equities remain volatile as Russia’s invasion of Ukraine progressed throughout last week, resulting in increasingly severe NATO sanctions on Russia. However, as the dispute progressed, the market priced in that the Fed would not employ aggressive monetary tightening, helping stocks rebound later in the week. Markets expect a slower liftoff with under six rate hikes in 2022, with inflation likely to remain marginally higher than previously anticipated. However, as tensions continue to rise, sanctions increase, and uncertain monetary forecasts persist, stocks will likely remain volatile.
• Amid domestic inflation, rising interest rates, quantitative tightening, geopolitical uncertainty (Russia/Ukraine war), supply constraints, and waning demand, investment opportunities and alpha generation are still available. However, investors must remain agile, dynamic, selective, and patient. Alternative investment funds that employ all these characteristics remain pivotal for investors to weather the persistent storm of uncertainty so far in 2022. For instance, selective equity sectors, safe-havens, and commodities remain poised to outperform. Among equity sectors, energy (oil, natural gas, etc.), utilities and defense sectors have the best risk/reward profiles. Meanwhile, safe havens such as the US dollar, gold, and government bonds can help minimize risk and maintain relative value during economic uncertainty. Commodities such as palladium and wheat (Ukraine is one of the largest wheat producers in Europe) illustrate some of the alternative asset classes with attractive relative value and optimal supply and demand characteristics.

Frank Timons and Mitch McCullough of Pier 88, managers of a convertible securities fund.

• Recent geopolitical events have caused turmoil in the markets as investors worry about slowing economic growth due to inflation and spiking gas prices.
• Companies are bracing for an uptick in cyber-attacks and cyber security companies are poised to benefit from increased spending as governments and companies shore up cyber defenses.
• Several next generation cyber security companies have convertible bonds offering different risk/reward opportunities to investors. This could create opportunities in the convertible bond asset classes, as our positioning has allowed us to have leverage to multiple cyber security companies that stand to benefit from the increasing security threats.

Simon Lack, of SL Advisors, and Portfolio Manager of an energy infrastructure fund

• Our team believes Germany’s decision to re-arm and build two LNG import facilities highlights the role of U.S. natural gas in providing energy security.
• The blocking of Russian banks from the SWIFT banking system injects uncertainty into the near-term economic outlook and Fed tightening schedule.

Thank you for reading The Lookout. Come back next Monday for more insights on what investors can expect in the markets.