On February 25, Wilmington Trust’s Chief Investment Officer Tony Roth hosted a webinar, “A Dark Day for Europe. The World Reacts,” which addressed how the Russia-Ukraine conflict could impact the U.S. and global economies as well as portfolios. He was joined by Chief Economist Luke Tilley, Head of Investment Strategy Meghan Shue, and Senior Portfolio Manager Mark Horst.
Here are some key takeaways from the conversation:
- Strategic sanctions: The White House responded to Russia’s aggression with sanctions that target financial institutions and individuals—and they have specifically not been directed at oil or natural gas. Additional sanctions have come from Germany, which halted its Nord Stream 2 gas pipeline project with Russia.
- Nuclear threats: Whether Putin would be willing to weaponize energy markets remains a wild card. While he has threatened severe consequences for any nation that threatened to impede his actions, curtailing exports would hurt the Russian economy, and longer term, push nations to seek other sources of energy.
- Inflation: The outlook is highly subject to the resolution of the oil and natural gas issues; there are additional commodity concerns as Russia and Ukraine are big wheat and corn producers, respectively; also, Russia is a major producer of aluminum, copper, and titanium, and palladium (used in catalytic converters), while Ukraine is the top producer of neon (critical to semiconductors). Major disruptions would exacerbate already-challenged supply chains. Still, we do not expect the conflict to drive inflation materially higher in 2022.
- Portfolios: Our base case does not include a material deterioration in the global economy. In the U.S., we maintain our projection for above-trend GDP growth of 3% in 2022. We retain a modest overweight to equities and are keeping a close watch on inflation, ready to adjust portfolios should circumstances warrant.
Please read the important disclosures at the end of this video.
The opinions, estimates, and projections presented herein constitute the informed judgments of Wilmington Trust and are subject to change without notice. Expected return information in this presentation is derived from forecasting. Forecasts are subject to a number of assumptions regarding future returns, volatility, and the interrelationship (correlation) of asset classes. Actual events or results may differ from underlying estimates or assumptions, which are subject to various risks and uncertainties. No assurance can be given as to actual future market results or the results of Wilmington Trust’s investment products and strategies. The information in this presentation has been obtained or derived from sources believed to be reliable, but no representation is made as to its accuracy or completeness.
An Overview of Our Asset Allocation Strategies
Wilmington Trust offers seven asset allocation models for taxable (high-net-worth) and tax-exempt (institutional) investors across five strategies reflecting a range of investment objectives and risk tolerances: Aggressive, Growth, Growth & Income, Income & Growth, and Conservative. The seven models are High Net Worth (HNW), HNW with Liquid Alternatives, HNW with Private Markets, HNW Tax Advantaged, Institutional, Institutional with Hedge LP, and Institutional with Private Markets. As the names imply, the strategies vary with the type and degree of exposure to hedge strategies and private market exposure, as well as with the focus on taxable or tax-exempt income. On a quarterly basis we publish the results of all of these strategy models versus benchmarks representing strategic implementation without tactical tilts. Model Strategies may include exposure to the following asset classes: U.S. large-capitalization stocks, U.S. small-cap stocks, developed international stocks, emerging market stocks, U.S. and international real asset securities (including inflation-linked bonds and commodity-related and real estate-related securities), U.S. and international investment-grade bonds (corporate for Institutional or Tax Advantaged, municipal for other HNW), U.S. and international speculative grade (high-yield) corporate bonds and floating-rate notes, emerging markets debt, and cash equivalents. Model Strategies employing nontraditional hedge and private market investments will, naturally, carry those exposures as well. Each asset class carries a distinct set of risks, which should be reviewed and understood prior to investing.
Each strategy is constructed with target weights for each asset class. Wilmington Trust periodically adjusts the target allocations and may shift away from the target allocations within certain ranges. Such tactical adjustments to allocations typically are considered on a monthly basis in response to market conditions. The asset classes and their current proxies are: large–cap U.S. stocks: Russell 1000® Index; small–cap U.S. stocks: Russell 2000® Index; developed international stocks: MSCI EAFE® (Net) Index; emerging market stocks: MSCI Emerging Markets Index; U.S. inflation-linked bonds: Bloomberg/Barclays US Government ILB Index; international inflation-linked bonds: Bloomberg/Barclays World exUS ILB (Hedged) Index; commodity-related securities: Bloomberg Commodity Index; U.S. REITs: S&P US REIT Index; international REITs: Dow Jones Global exUS Select RESI Index; private markets: S&P Listed Private Equity Index; hedge funds: HFRI Fund of Funds Composite Index; U.S. taxable, investment-grade bonds: Bloomberg/Barclays U.S. Aggregate Index; U.S. high-yield corporate bonds: Bloomberg/Barclays U.S. Corporate High Yield Index; U.S. municipal, investment-grade bonds: S&P Municipal Bond Index; U.S. municipal high-yield bonds: Bloomberg/Barclays 60% High Yield Municipal Bond Index / 40% Municipal Bond Index; international taxable, investment-grade bonds: Bloomberg/Barclays Global Aggregate exUS; emerging bond markets: Bloomberg/Barclays EM USD Aggregate; and cash equivalents: 30-day U.S. Treasury bill rate.
The CBOE Volatility Index (VIX) is a real-time index that represents the market’s expectations for the relative strength of near-term price changes of the S&P 500 index (SPX). Because it is derived from the prices of SPX index options with near-term expiration dates, it generates a 30-day forward projection of volatility.
The S&P 500, is a stock market index tracking the performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices.