The invasion of Ukraine has caused an economic and geostrategic tsunami. If at the end of last year they were already seeing a certain slowdown in the rate of growth – not a recession – the armed conflict has accelerated this trend. Regardless of the duration of the conflict and the terms of the peace treaty, Europe has seen its seams and must work to strengthen what are today its weaknesses: security and dependence on energy and supplies from abroad.
All these circumstances paint a volatile scenario, less benign than what the indicators predicted just a few months ago, but still with room for investment. The Banca March experts sum it up in one word: prudence. When it finally seemed that we were leaving the ravages of the pandemic behind, the war caused by the Russian invasion of Ukraine once again altered the economic cycle. “It is not a radical change, but we do appreciate new coordinates that are transforming the investment environment”, declares Juan Antonio Roche, deputy general manager and director of the products and strategy area at Banca March.
This new phase of the cycle is determined by lower growth and higher than expected inflation. This inflationary panorama, with energy raw materials skyrocketing, suggests channeling investments into real assets such as infrastructure, raw materials, or the real estate sector. "Assets that, either because they are concessionaires, or because they have income linked to inflation, generally protect well from upward movements in interest rates," says Roche.
With regard to rising interest rates, both short-term and long-term, the recommendation is to bet on those assets that perform well in an environment of higher rates. “Floating bonds, those whose coupon is adjusted by movements in interest rates, are going to perform well. Alternative financing will also have it, ”says Roche.
The latter is the domain of MV Credit, one of Banca March's co-investment projects. “It is a project that finances entrepreneurs at a variable rate. In this case, at a real rate and net of commissions well above inflation”. Finally, long-term equities are often the best hedge against inflation. “The raw material of a bank is the interest rate. The higher it is, the higher its margin will be”, emphasizes Roche.
The high volatility, far from being an obstacle, is an investment opportunity for active management. “Alternative managers make a living from the market moving and, furthermore, doing so with disparate behaviors, between geography, sectors or companies”. It is also true for structured products, since one of the main elements when structuring is volatility, which, together with the interest rate, the dividend and the correlation, make up the key variables of these products. "At times when volatility picks up, what structured companies pay, all other criteria being equal, also increases."
The past five years have been determined by globalization and industrial relocation. Covid first, with part of the supplies paralyzed in Chinese ports, and the war in Ukraine determine the need to rethink energy dependence and security.
The West needs to recover energy, food and productive sovereignty. In a European Union without oil or gas, it is urgent to accelerate the energy transition and, meanwhile, establish energy efficiency policies. But also, bring agriculture into the 21st century, make it more efficient, more sustainable and more innovative.
Finally, if the Ukraine conflict has shown anything, it is the need to increase defense spending. For years, many member states of the Union did not reach 2% of GDP in defense spending. The Russian threat has put on the table the need to invest in security, both in the military and in cybersecurity. Without forgetting that in a context as fragile as the current one, supply lines must also be secured.
Far from falling into alarmist theses, experts insist that the cycle is not over yet. One of the factors that encourages us to think about it is that employment is still showing strength, with hiring figures still positive that predict, at least, some ten more months of growth.
All in all, the scenario suggests thinking twice before investing and weighing strategies well. As a general rule, they advise creating portfolios where the long term is prioritized, with a much higher weight in alternative or illiquid investments. Holding tight while waiting to see the clearest horizon is not, nor can it ever be, a good investment strategy.
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