How We're Positioned Against Heightened Market Risks

Russia’s invasion of Ukraine has unleashed a humanitarian crisis that has horrified the world.

The situation has created further market risk following what had already been a volatile start of the year. While the global economy should remain resilient as we reopen globally, there are five key downside risks I see, several of which are heightened because of the conflict.

First, stock valuations remain stretched compared to history, although they have softened recently.

Second, the exit from central bank monetary stimulus is definitely gathering pace.

Third, earnings growth has normalized after being exceptionally strong last year.

Fourth, and definitely most importantly, the inflation outlook has worsened. The situation in Ukraine brings a new set of supply chain issues on top of existing supply chain issues and rising commodity prices. So, consequently, there’s more inflation for central banks to contend with.

Finally, to state the obvious, Russia’s invasion of Ukraine has raised geopolitical risk sharply. The situation is just highly unpredictable. It could end relatively soon or drag on for some time.

At T. Rowe Price, our Asset Allocation Committee was positioned cautiously early in 2022, with a focus on mitigating downside risk:

So we were underweight stocks relative to bonds.

We held short duration positions in fixed income to limit exposure to rising rates.

We were overweight in equity segments where valuation and rate risk was lower.

Given our cautious stance at the beginning of the year, we have not adjusted our asset allocation positioning in response directly to the situation in Ukraine. We have reduced on the margins some cyclical risk, but otherwise we have remained on the same course we were on at the beginning of the year. 

Significantly for us, however, because typically we like to lean against the wind, here we have chosen not to lean into the market weakness because we think that downside risks remain elevated. We’ll monitor developments carefully and will be ready to adjust our positioning if the situation changes. Thank you.