AS the war in Ukraine enters its second month, Wall Street is considering an array of possible outcomes, from de-escalation to protracted conflict.

       Goldman Sachs Group Inc is recommending cheap hedges against stagflation in one scenario.

       BlackRock favours short-dated bonds in another. French titan Amundi SA is warning of tighter liquidity. Investors who’d taken to the sidelines at the time of the Russian invasion are under increasing pressure to hedge their risks. Many investment specialists say they’re ditching high-conviction strategies that bet on market direction.

       “We’re living in a climate of elevated geopolitical uncertainty,” said Mark Dowding, chief investment officer at BlueBay Asset Management in London, which manages US$127bil (RM533.91bil) in assets.

       “Some of this increase in the risk premia is likely to be permanent because we’ve seen something seismic in the course of this month. Who knows what’s going to happen at a moment’s notice? We could have any headline in the next hour or two.”

       A point of consensus is that inflation isn’t subsiding any time soon, and many warn that liquidity and trading conditions may get far tougher.

       “Market liquidity conditions appear resilient so far, but this is a point of attention,” said Vincent Mortier, group chief investment officer of Amundi, Europe’s largest money manager with US$2.3 trillion (RM9.67 trillion) of assets under management. They’ve hedged portfolios with derivatives, such as credit default swaps and put options.

       Here are some of the scenarios:

       Long war

       “A protracted war is the middle of the road scenario that looks likely to many,” said Agnes Belaisch, chief strategist for Europe at Baring Investment Services Ltd in London.

       “Investors prefer not to position for any given scenarios about war and peace, given how out of any rationale the path ahead is. Escalation is the worst outcome that many prefer to keep a tail risk.” The US dollar remains a solid haven asset, in her view. Eurozone peripheral short duration bond spreads are attractive as “we believe the European Central Bank will stay relatively loose on monetary policy, protecting the carry,” she said. Long positions in small and mid-cap technology stocks could do well in an era of intensifying national security, according to Mark Haefele, CIO at UBS Global Wealth Management.

       UBS Group AG manages US$2.6 trillion (RM10.93 trillion) in assets, according to its website. He favours investments in the cybersecurity sector and enabling technologies such as 5G+ in wireless telecommunications.

       US dividend-paying stocks are a haven given their exposure to the “beneficiaries of rising energy prices as well as businesses that provide stability through heightened volatility,” Michael Fredericks and Justin Christofel at BlackRock Financial Management Inc, wrote in a note to clients.

       Veteran emerging markets investor Mark Mobius expects the conflict to continue for at least a year. He doesn’t foresee a recession in the United States or Asia, but broadly said Europe isn’t in a good position.

       “Equities are the way to go because we are seeing inflation coming up, so equities would be the best defence against inflation,” he said. He prefers companies with pricing power and the ability to pass on costs to consumers in emerging markets such as Taiwan, India, South Korea, Vietnam, Turkey and Brazil among others. He used the recent market dip to top-up some investments in Taiwan, Brazil and India.

       De-escalation

       Global big tech, with an emphasis on companies with pricing power, is the go-to for Singapore-based DBS Bank Ltd, which sees the world returning to “inflationary growth” – a scenario it sees as positive for stocks broadly. Like many investors, however, DBS is underweight on European equities because the region will take time to resolve its energy reliance on Ukraine and Russia.

       “In times when global liquidity is tightening, stay with good quality, highly profitable companies” such as cash-generating tech companies, Hou Wey Fook, CIO at DBS said at a virtual briefing this week.

       The bank has upgraded Asia ex-Japan equities to “overweight” from “underweight”, with a preference for South-East Asian stocks, as they benefit from rising commodity and energy prices.

       Short-dated bonds look more attractive relative to long end, according to BlackRock Investment Institute, as central banks will learn to live with moderate supply-driven inflation, rather than taking policy rates into restrictive territory. “We expect the sum total of rate hikes to be historically low given the level of inflation,” wrote BII analysts led by head of macro research Elga Bartsch. They also favour US and Japanese equities over credit. Chinese stocks are also favoured positions for both DBS and BII, given the likelihood of easier policy as other central banks tighten, though BII warned “China’s ties to Russia have created a geopolitical stigma risk that could pressure some investors to avoid Chinese assets.”

       Sanctions and commodities

       “Even if sanctions were lifted tomorrow, Russia’s traditional clients would be looking to diversify their suppliers,” said Barings’ chief global strategist Christopher Smart.

       “Prices are set for more gyrations even as they likely drift higher.” Barings likes commodity-linked currencies, and is avoiding net importers. Among BlueBay’s favourites are the Australian dollar and South African rand, while the Indian rupee and the Turkish lira are among their picks for currencies to play on the short side. — Bloomberg

       Emily Barrett, Ruth Carson and Ishika Mookerjee write for Bloomberg. The views expressed here are the writers’ own.