Russia’s invasion of Ukraine has such a broad range of possible outcomes that UBS has decided to downgrade its stance on shares, which is in stark contrast to the strategic call by another broker over the weekend.
Peter Berezin, the chief global strategist at Canadian broker BCA Research, over the weekend told clients that, although he saw a one-in-10 chance of nuclear armageddon, they should “largely ignore existential risk” and “stay bullish” on equities.
“Despite the risk of nuclear war,” he said, “it makes sense to stay constructive on stocks over the next 12 months.”
His argument had a certain logic.
“If an ICBM is heading your way, the size and composition of your portfolio becomes irrelevant,” Berezin explained. “Thus, from a purely financial perspective, you should largely ignore existential risk.”
Back at UBS, Mark Haefele, chief investment officer of the bank's global wealth management arm (which it's fair to say probably has quite a few more, and larger clients than BCA), was revising his previously bullish view on stocks.
This new stance, said Haefele, reflected increased uncertainty stemming factors, “including, but not limited to President Putin’s intentions, the extent of future sanctions, military outcomes, the defense policies of non-NATO states, China’s perceived posture, commodity prices, global growth, inflation, and central bank policy”.
On top of this uncertainty, he said the decision reflected the bewilderingly wide horizon of possibilities, which made his strategy team less confident in any individual market outcome.
The Swiss bank's central scenario remains for equity markets to end the year higher than today, but with the risk-return profile being "less clear" this means the tactical stance on equities has shifted from 'most preferred' to 'neutral'.
UBS continued to view global energy equities and the US dollar in its 'most preferred' rating, with the team believing both "should continue to act as effective portfolio hedges in the near term".
While Eurozone equities have been moved to 'neutral', given the heightened uncertainty and the potential for negative economic and earnings growth revisions in the region, UBS likes Chinese equities relative to other markets in Asia.
For the medium and longer term, Haefele said: “Historically, geopolitical events—even those that have changed the course of history—have rarely left a long-lasting mark on markets. This speaks to maintaining long-term exposure to equities.
“But with markets volatile and outcomes uncertain, we believe investors should now review portfolio allocations and bring holdings in equities back into line with long-term strategic asset allocation targets."
Haefele said that as military outcomes and political motives are likely to remain opaque, UBS believe it is “more practical to focus attention on the potential impact of the war and sanctions on commodity prices" and for investors to prepare for a broad range of potential outcomes rather than focusing on one in particular.
BCA's Berezin suggested one downside scenario was that, “If Putin concludes that he has no future, the risk is that he will decide that no one else should have a future either.”
But on the upside, he said if World War III is avoided, then markets would experience a “freak-out moment” over the next few weeks.