Stock markets seek to hedge in a world of rising rates and Ukrainian risk


From increasingly hawkish central banks to worries about a war that could exacerbate an inflationary spiral, the risks for equities are mounting.

Stock markets rattled on signs that central banks will tighten policy much more aggressively than expected, disrupting a rally that had braved successive outbreaks of a once-in-a-century pandemic. They now face the uncertainty of a potential military conflict, although Russia has repeatedly denied plans to invade Ukraine.

As too many moving parts cloud the outlook for markets, some key themes are beginning to emerge: First, the era of blind recovery fueled by abundant liquidity is coming to an end. And second, investors may need to avoid lower-quality stocks that are vulnerable to a less forgiving macro backdrop.

Here’s an outline of a stock trader’s playbook for this new era based on conversations with investment managers and strategists and notes to clients of major brokers.

Choose the quality
“Investors should focus on higher quality investments, rather than more speculative investments that have benefited from low interest rates and high liquidity,” says Carin Pai, executive vice president and chief management officer. portfolio manager at Fiduciary Trust International. They should look for companies with “more stability and more predictability in earnings,” she said in an interview.

These include cheaper, so-called value stocks, as well as more expensive companies, Pai said. This earnings season has seen markets reward some of the most expensive companies in the S&P 500 index for strong earnings, while harshly punishing failures.

The era of chasing returns in “a single particular market, factor or sector” may well be over, wrote strategists at Goldman Sachs Group Inc. led by Peter Oppenheimer in a note. “That should mean a return to Alpha,” picking stocks based on potential growth relative to price, they said.

Ukrainian risk
The arguments in favor of quality are reinforced by the return of geopolitical risk. With the United States warning that a Russian invasion of Ukraine could be imminent, Morgan Stanley’s chief U.S. equity strategist Mike Wilson advised investors to maintain a defensive bias and seek refuge in quality stocks .

While most strategists expect the impact of a potential conflict to be brief, volatility is expected in the short term. UBS Global Wealth Management on Monday advised clients to manage downside risk while preparing for a rebound later in the year.

“Sectors like energy and financials, value stocks and materials are both positioned to benefit from robust economic growth and are relatively well insulated from primary market risks,” wrote the strategists led by Mark Haefele in a note.


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