Insights

In the wake of Russia’s invasion, social factors such as energy supply security, consumer protection and responsible sourcing demonstrate the importance of an inclusionary ESG approach.

Russia’s energy tentacles, intertwined throughout Europe’s power network, may prove difficult to excise.

The U.S. Federal Reserve met expectations and increased interest rates by 25 basis points.

Should the Russia-Ukraine conflict persist, it would lead to further tightening of financial conditions but is unlikely to deter the Federal Reserve from a 25 basis point interest rate hike in March. Tighter conditions will slow economic growth at the margins and constrain financial markets over the short term, but not over the longer term.

While it might seem better to focus on current so-called ESG leaders, we believe there is untapped value in the underappreciated ESG improvers.

• Economic recovery likely undeterred: Rising energy prices add risk to Europe’s recovery but are unlikely to derail the global economic recovery.
• Expect further equity volatility: We see the strongest impacts in commodities, energy and financials, but focus should shift quickly to interest rates and supply-chain resolution.
• Seeing value amid spread widening: We believe the impact of Russia’s actions on fixed income markets has largely played out, and any further widening in credit spreads could present opportunities.

The market’s expectations for curve flattening may be excessive, as the timing of rate hikes and the aggressiveness of the Federal Reserve are still open to debate.

January 1, 2022 marked a significant milestone in the transition from LIBOR to alternative reference rates.

We see scope for continued global equity gains as the impacts from Covid, policy stimulus and inflation diminish. The current balance of market factors keeps us overweight U.S. large cap stocks.

Matthew Toms, CFA, Chief Investment Officer of Fixed Income, shares our outlook for the markets for the first half of 2022.