Topic Tags: U.S Economy

Collapse of the Russian Ruble

This week, as the crisis in Ukraine continues to evolve, we look at the devaluation of the Russian ruble amid retaliation from the West. In response to Putin’s invasion of Ukraine, allied governments are imposing financial sanctions, companies are pulling back from operations in Russia, and investors are looking to exit Russian investments. As a result, the ruble, now worth less than a penny, has fallen more than 30% over the last week. The pace of the move surpasses even that seen in 2014 when Russia moved to a floating exchange rate amid pressures following its annexation of Crimea, resultant sanctions, and the sharp drop in global oil prices. In 2014, Russia was able to leverage its mountain of foreign currency reserves to eventually help stabilize the ruble. That ability is severely restricted this time following the decision to cut off certain Russian banks from SWIFT, the financial messaging system used by more than 200 countries to link money transfers between the world’s banks.

The sharp devaluation of the ruble could shock Russia’s economy. Inflation in Russia surpassed 9% as of February 25th, above the country’s 4% target. The Russian central bank on February 28th more than doubled its benchmark interest rate to 20% in an attempt to prevent a run on banks. The line the world is walking to manage inflation without negatively impacting growth is now much finer in Russia, with reverberations likely to be felt globally. Inflation, the path of rising interest rates, and geopolitical tensions remain key risk factors for investors this year, and we will continue to keep clients updated on developments and any related portfolio recommendations.

Print PDF > Collapse of the Russian Ruble

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

OCIO Momentum Continues

One of the most significant evolutions in our business over the last decade has been the growth of our Outsourced Chief Investment Officer (“OCIO”) services platform. What at first seemed like chance requests over a decade ago from a handful of clients looking for additional help managing their portfolios has become increasingly mainstream. More than half of our prospective client engagements last year inquired about OCIO services. Our experience is certainly reflective of a broader industry trend as OCIO assets under management have grown from $90 billion to an estimated $2.7 trillion over the last fifteen years.¹ Given the industry growth and increased interest in OCIO services from our client base, we thought we’d share our experience as to why institutions are asking about OCIO and what the major challenges are that Marquette has helped these clients solve.

Read > OCIO Momentum Continues

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Life During Wartime: Assessing the Market Impact of the Russia/Ukraine Conflict

Recent days have seen an escalation of political tensions in Eastern Europe, and on February 24th, Russian forces began conducting large-scale military operations in Ukraine. These actions have drawn widespread condemnation from the international community, with NATO repositioning troops along its eastern flank and both the United States and European Union announcing intentions to impose sanctions on a variety of Russian financial institutions. The conflict has also threatened the stability of global markets, particularly those areas of the world economy that are most sensitive to energy and the performance of emerging market countries. The aim of this newsletter is to assess the ramifications of Russian actions vis-à-vis the broad market and determine the potential implications of further escalation of the conflict going forward, including:

  • Equity index performance
  • Index exposure to Russia and Ukraine
  • Commodity market expectations
  • Central bank policy and inflation impacts
  • Historical impact of similar exogenous shocks on equities

Read > Life During Wartime: Assessing the Market Impact of the Russia/Ukraine Conflict

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Russia & Ukraine: All Eyes on Energy

Escalating tensions between Russia and Ukraine have the world on edge. While the situation continues to evolve and the likelihood of a full-scale war remains unlikely, markets are attempting to price in the risk. This latest geopolitical clash builds on an already tumultuous start to the year for financial markets. In the U.S., the S&P 500 has fallen 8.1% from its all-time high on January 3rd amid concerns about rising inflation and consequential rate increases by the Fed. The latest year-over-year inflation figures for both the U.S. and Eurozone have reached alarming milestones, with the U.S. hitting a new 40-year high and the Eurozone setting a new record going back to 1991. Ballooning energy prices have been the greatest contributor to rising inflation, evident in the delta between consumer inflation and core inflation, which removes more volatile prices like energy- and food-related costs. The friction between Russia and Ukraine is only expected to worsen this dynamic, given Europe’s reliance on Russia for energy.

The European Union imports nearly 40% of its total natural gas consumption from Russia. While global oil prices tend to trade largely in tandem due to OPEC’s influence, natural gas prices are more sensitive to regional access and supply. The Dutch TTF Natural Gas price has historically hovered around $20/MMBtu but has surged more than 300% over the last 12 months, while U.S. Natural Gas is up just 36.9% over the same period. While geopolitical fears may continue to drive up the cost of crude as uncertainty builds, the more immediate impact is to the European energy markets via natural gas prices. In the most direct sense, the impact to global developed markets may be low, with the Energy sector comprising only 2.9% and 3.9% of the S&P 500 and MSCI EAFE indices, respectively, though knock-on effects may be broader, including economic sanctions and additional measures to combat inflation that could ultimately impact growth. Past geopolitical stress events provide little guidance with moving pieces always evolving. Tensions could deescalate and we could see little fallout, as was the case following the 2014 Crimean crisis, or pressures could mount with wide-reaching global implications. For now, we will continue to monitor and help our clients navigate the volatility.

Print PDF > Russia & Ukraine: All Eyes on Energy

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Navigating Inflation from Up Here

Despite year-to-date turbulence, equity markets remain near all-time highs. While company earnings have more than recovered from the lows of early 2020, valuation multiples are also still well above pre-pandemic levels. Our chart of the week looks back at historical trailing P/E levels of the S&P 500 in different inflationary environments. Historically, in months when consumer prices were up between 6% and 8%, the S&P 500 traded at an average 12X earnings, below its long-term average of 17X. As of January 31st, the S&P 500 traded at 23.7X trailing earnings.

With most of these data points coming from the 1970s, this is more of an interesting anecdote than a prescriptive playbook, but does directionally make sense. Higher inflation tends to lead to rising interest rates, as the Federal Reserve looks to maintain price stability. Higher interest rates, in turn, put downward pressure on valuations, as the discount rate used to value a stream of future earnings increases. Companies whose value is largely derived from future growth in earnings see a pullback in the multiple investors are willing to apply to current earnings.

The Fed’s increasingly hawkish tone has already led to a meaningful correction in multiples, with potentially more volatility to come. While perhaps unnerving, the change in backdrop is creating opportunities for stock pickers. Active long-only and long/short managers should be better positioned to navigate market headwinds and add value for investors. While we of course do not have a crystal ball, we are looking forward to active managers hopefully capitalizing on an improved opportunity set this year.

Print PDF > Navigating Inflation from Up Here

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Any Port in a Storm

The volatile start to the new year has all eyes on the Federal Reserve and its increasing hawkishness. As the Fed prepares to raise interest rates later this year, we look at reverse repurchase agreements and what they mean for the markets.

As part of the Federal Reserve’s efforts to maintain monetary policy and manage liquidity, the New York Fed engages in temporary transactions where reserve balances of excess liquidity are added to or reduced through repurchase (repo) and reverse repurchase (reverse repo) agreements. These operations have a short-term, self-reversing effect on bank reserves. Repurchase agreements involve the Fed purchasing Treasury securities from a counterparty (typically a large institution with excess reserves), with an agreement to resell the securities back at a slightly higher price, representing a small rate of interest. The repo transaction temporarily increases the supply of reserve balances in the banking system and provides liquidity. Reverse repurchase agreements involve the opposite, where counterparties temporarily purchase Treasury securities to be sold back at a later date. Reverse repo transactions help alleviate any undue downward pressure on the effective federal funds rate and set a floor under overnight interest rates by providing a short-term alternative investment for large institutions with excess liquidity reserves.

After a period of dormancy in the beginning of 2021, the Federal Reserve’s overnight window for reverse repurchase agreements saw a rapid rise in demand when the counterparty limit for reverse repos was raised from $30B to $80B in March. This trend continued to accelerate when the limit was again raised to $160B in September, closing out the year at a record level of $1.91T in volume. Low interest rates and the Fed’s quantitative easing efforts presented large institutions with a challenge as to where to invest record levels of excess liquidity reserves. The solution has so far been to make use of the overnight window and earn minimal interest via a risk-free investment in Treasuries.

Time will tell how the Fed will execute its monetary policy changes this year and how markets will respond to that shift. Institutions currently utilizing reverse repurchase agreements may change course once they have higher yielding alternatives, with the impact to the economy and market dependent on where those reserves go. Marquette will continue to carefully follow policy decisions from the Federal Reserve and monitor other indicators, like the demand for overnight repurchase agreements, to help provide clarity during this period of heightened market volatility.

Print PDF > Any Port in a Storm

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

2022 Market Preview: New Year’s Resolutions for the Federal Reserve and Investors

Financial markets kick off 2022 against a backdrop of elevated inflation, a(nother) COVID surge, looming interest rate hikes, an undersupplied labor market, and booming equity returns over the last three years. In particular, concerns over rising inflation and higher rates have forced policymakers and investors to look more closely at their respective responsibilities, and we expect notable changes from both parties in 2022. When looked at more closely, these pivots are not much different than some of the New Year’s resolutions that people make each year.

In this letter, Director of Research Greg Leonberger, FSA, EA, MAAA posits:

  • The Fed resolves to lose weight and exercise more
  • Consumers reduce debt and increase savings
  • Can bond investors adopt a more positive outlook for 2022?
  • Will equity markets ever stop smoking?
  • Should equity investors travel more to enhance their return potential?
  • Learn something new to achieve risk and return goals
  • Reduce stress

Read > 2022 Market Preview: New Year’s Resolutions for the Federal Reserve and Investors

Download > 2022 Market Preview Report with 150+ additional charts and data, organized by asset class

Watch >  2022 Market Preview Video with presentations by our research team analyzing last year’s performance as well as trends, themes, opportunities, and risks to watch for in 2022

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. Marquette is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Marquette including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request.

2022 Market Preview Video

This video coincides with our 2022 Market Preview letter from Director of Research Greg Leonberger, FSA, EA, MAAA and provides analysis of last year’s performance as well as trends, themes, opportunities, and risks to watch for in 2022.

Our Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real estate, infrastructure, private equity, and private credit, with presentations by our research analysts and directors.

Sign up for email alerts to be notified when we publish new research here.
For more information, questions, or feedback, please send us an email.

Office Space in Need of a Booster

As the Omicron variant continues to spread like wildfire across the globe, companies once again find themselves modifying plans for a return to in-person work. Although the market for U.S. office space started to show signs of stabilization during the second half of 2021, the new wave of Omicron cases has already started to impede the recovery across most industries. As a result, the office sector could potentially endure the most profound and longest lasting impact from the recent case surge among the four major core property types. Current remote work dynamics and incremental office supply are expected to exert additional upward pressure on vacancy rates, which increased during the third quarter of 2021 to 16.8%. While the emergence of virus variants and the prevalence of unvaccinated individuals may act as catalysts for permanent changes within the office sector, many companies are expected to opt for flexible work schedules in 2022 rather than leasing additional real estate. With businesses contemplating further vaccination requirements, as well as continued travel restrictions and virtual interactions, there now exists a widening gap between occupied and underutilized office space. To that point, net absorption rates, which serve to quantify the difference between leases and vacancies, have fallen by roughly 120 million square feet during the pandemic, representing the largest drop since the 2001 Technology Bubble.

Going forward, corporations and employees alike may be forced to navigate through a unique work environment on a permanent basis. While hybrid and remote working approaches will likely serve as headwinds for the demand for office space in the aggregate, institutional investors may be well-positioned to achieve portfolio alpha with long-term exposures to high-quality tenants, Class A properties, office conversions, and distressed low-occupancy buildings. As a firm, Marquette will remain focused on working with our clients to target markets with a compelling mix of talent, demographics, and tenants.

Print PDF > Office Space in Need of a Booster

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Credit Spreads Snap Back from Initial Omicron Surge

Given the positive news on the weakness of the Omicron variant and its susceptibility to at least some of the COVID-19 vaccines, credit spreads have generally retraced their widening since the first Omicron case in South Africa was reported to the World Health Organization on November 24th, 2021. Our chart this week compares high-yield spreads against two averages using the Bloomberg High Yield index. The lower dotted line is the average spread for the year-to-date period, with current spreads sitting just above of this figure. The higher dotted line is the since-inception average spread (excluding the extreme periods of 2008 and 2009), with today’s spreads still generally extremely tight compared to this long-term average despite the recent Omicron scare. While we assess only U.S. high yield corporate spreads, these are generally representative for investment grade bonds, bank loans, and emerging markets debt as well.

Omicron has quickly spread to at least 57 countries around the world thus far, but spreads tightened across the board last week as President Biden chose to institute stricter COVID-19 testing requirements for travelers entering the U.S. from abroad instead of implementing more lockdowns and broad mask mandates. Additionally, Moderna and Pfizer have been mobilizing to update their vaccines against the Omicron variant. However, the tail end of last week brought with it some widening pressure as Europe tightened its COVID-19 restrictions and the Consumer Price Index saw a 6.8% increase for the month of November on a year-over-year basis, topping the previous month’s 6.2%. This figure raised some concern that the Federal Reserve may accelerate its tapering and rate hike schedule.

Last week, the fully vaccinated rate remained at 60% for the U.S. and rose one point to 45% for the world. With still a long runway to go before herd immunity levels of 80% are reached, and since issuers remain risk-averse as evidenced by benign fundamentals ranging from generally low leverage to use of loan and bond issuance proceeds directed towards refinancings rather than LBOs, we may expect spreads to potentially tighten further. It is worth noting that this tightening may not be without potential dislocations along the way. As of this writing, spreads are very near all-time tights. Marquette will continue to monitor fixed income valuations, fundamentals, and technicals as we progress through the recovery from the pandemic.

Print PDF > Credit Spreads Snap Back from Initial Omicron Surge

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.