Russia/Ukraine: Implications for Australian fixed interest
Jay Sivapalan, Head of Australian Fixed Interest, discusses what the unfolding situation in Ukraine means for Australian Fixed Interest and the team’s investment strategies.
- The conflict has had little impact on the Australian fixed interest asset class so far.
- Weakening credit markets due to rising inflation and the normalisation of policy have been further depressed by the conflict.
- The market, however, remains squarely focused on any changes to the path of policy normalisation.
To-date, the global market’s reaction to Russia’s invasion of Ukraine has been relatively muted, with a brief risk-off period for share and credit markets and a flight-to-safety for safe-haven assets, such as government bonds.
The most pronounced movements have been yields of Russian government bonds and emerging market valuations, particularly for economies with close trade ties to Russia.
Liquidity was generally lighter in credit markets, with any weakness in pricing reflected principally in derivatives markets, including Credit Default Swaps (CDS), as investors seek protection for their portfolios.
Markets resumed their focus on inflation, particularly with oil prices hitting 14-year highs1 on conflict-related supply shortages and its implications for the path of central bank policy tightening.
In Australia, while government bond yields are still at pre-conflict levels, weakness in credit markets resulting from post-pandemic policy normalisation continued this trend following the invasion news. This was particularly the case for the credit derivatives market, rather than physical securities.
Fixed interest portfolio considerations
Leading into this event, our Australian Fixed Interest portfolios had been positioned with a long duration stance, as well as having some credit protection via CDS. These cushioned the portfolios during the initial phase of the invasion and ensuing market reaction.
Overall, the strategies managed by the Janus Henderson Australian Fixed Interest team have no direct exposure to Russia and little to no direct exposure to broader Europe or emerging markets that have close economic ties with Russia.*
Whilst too early to tell how developments around Ukraine and Russia could escalate, the focus for portfolios remains on capital preservation during these episodes.
Should the recent developments affect the European and broader global economic recovery, we’ll see a slower normalisation of monetary policy than markets have currently priced in, which is what the market is squarely focused on.
As an active funds manager, we have the ability to manage our portfolios through periods of market volatility and uncertainty. With experience in investing through multiple market cycles, our team takes a long-term approach, aiming to preserve capital in volatile markets, while actively identifying investment opportunities.
All views are as at 7 March 2022.
*Subject to change without notice.
1. WTI Spot Price in US dollars (USD), as at 7 March 2022.
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