Topic: Market Outlook

View of Russia’s Invasion of Ukraine

At TIFF, we are hopeful for a near-term peaceful resolution of Russia’s invasion of Ukraine. We are mindful of the dire humanitarian consequences on Ukraine and its people.

There are many significant moving pieces in this conflict – the actions of Putin and Russia, the heroic response of Zelensky and the Ukrainian people, the coordinated and unified response of Europe generally, the United States’ evolving role, the response from China, and, alarmingly, the first genuine threat of nuclear engagement in this century. Although the number of actors and complexity of this event contribute to a wide range of possible outcomes, we think a few implications are more likely than not. Below, we provide our assessment of market impact, our portfolio positioning, and our actions in response to the market conditions created by the invasion and subsequent developments.

Market Impact

Market reaction has been global and across asset classes. Equities generally have fallen, particularly in Europe as the prospect of a protracted conflict, higher energy prices, and possible recession weighs on stocks. Bonds have rallied, causing yields to drop. Oil has hit decade-high prices as buyers shun Russia, which is second globally behind Saudi Arabia in production. Gold and bitcoin have also rallied, albeit less so.

Market Expectations

Our internal optimist has us seeking a clear “best-case” scenario, but our internal realist sees few positive near-term repercussions.

Inflation has and will be negatively impacted, as, similar to our experience with COVID, supply chains are reworked and there is added demand for certain goods without commensurate increases in production. If all else were equal, this rise in inflation may force the Federal Reserve and other central banks to be even more hawkish than they have become in recent weeks.  However, all else is not equal.  Because of the wide range of outcomes, the market now perceives a bit slower retraction of accommodation as banks proceed cautiously and also are careful to forestall a “Lehman-like” moment.

Longer-term is even less predictable, though some developments seem likely. The European Union and individual European countries have indicated that they will vastly increase defense spending. Europe may also reduce its vulnerability to Russia by accelerating its transition to green energy and / or allowing oil production. The US may also allow for increased oil production to offset a sustained reduction of Russian oil imports. Two other possible secondary effects of economic sanctions: 1) intentional decoupling of connected economies to reduce interdependence; and 2) revisiting crypto as a possible workaround for sanctions and asset freezes. We do expect the reversal of some recent market trends. For example, if the US and / or Europe are able to wean themselves off Russian oil through production or alternate supply, the war may counterintuitively expedite oil’s ultimate decline.  Similarly, while near-term we see inflation increasing, dramatic expansion and duplication of capacity in energy, alternatives, food, etc., may ultimately lead to lower long-term inflation.

TIFF Exposure

Our direct exposure to Russia is de minimis, with approximately 0.5% of any given portfolio as of February 28.

Action

We are monitoring the situation closely, staying in close contact with our managers, and avoiding making large, reactive moves.  We remain underweight bonds and have rebalanced back to slightly above our target for equities. We have explored and are considering inflation hedges, but are mindful of how expensive hedges have become in recent weeks. Our portfolios are well diversified, and we are prepared to adapt quickly as needed.

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Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

There is no guarantee that any particular asset allocation or mix of strategies will meet your investment objectives.

These materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.

Executive Summary:  Perspectives Around Recent Market Volatility
January 31, 2022

What happened?

Since the beginning of the year, the world’s major stock indices are down, and the United States indices in particular have suffered losses. From their early January highs, the All Country World index and the S&P 500 had fallen ~10%, while the Nasdaq composite had fallen ~15%, before each recovered slightly on January 28, 2022.

Although the downward moves are not severe within the context of normal stock market volatility, they appear so for two reasons. First, 2021 was particularly calm following the turbulent market events of 2020. As shown on Chart 1 below, the S&P 500 rose or fell more than 2% only seven times in 2021 versus 44 times in 2020. Moreover, Chart 2 shows that while realized volatility in 2021 was slightly below the 10-year average, it was significantly below the market volatility experienced in 2020. More broadly, the stock market tends to fall 10% every 1.5 to 2 years, so these recent moves only are unusual when comparing the stock market to particularly calm times. Second, underneath the headline indices, there is a notable rotation happening and pockets of truly astonishing capital destruction. For an example of a rotation, the S&P 500 Energy index has gained ~18% YTD while the S&P 500 Consumer Discretionary index has lost ~13% YTD, compared to the last five years when energy stocks generated annualized losses of 2% and consumer discretionary stocks generated positive annualized returns of 16%. For examples of capital destruction, there are many, including meme stocks, SPACS, recent IPOs, retail favorites being cut in half, or worse. On the Nasdaq composite, the number of companies making 52-week lows versus 52-week highs currently has only been exceeded in March 2020 and late 2008 over the last 25 years.

Please click on the Download PDF button to read the full whitepaper.

Executive Summary:  The Inflation Outlook for Non-Profit Portfolios
Fall 2021

Please click on the Download PDF button to read the full whitepaper.

For the first time in decades, year-over-year US inflation is meaningfully exceeding the Federal Reserve’s 2% target, a notable departure from the low and stable inflation regime that the US has enjoyed since the early 1980s.  We would argue that this regime, and the associated lower interest rate environment, has been instrumental in a variety of strong economic and financial market outcomes.

Over the last few months, a variety of market participants, journalists, policy makers, and others have engaged in a spirited debate as to where inflation will head in the coming quarters and years. The key question is whether this recent spike in prices is transitory as the Fed and Biden administration have suggested, or emblematic of a move away from this highly desirable, low, and stable regime.

Our view is that while inflation may be a bit higher than what we have become accustomed to and persist at higher levels for longer than what was originally suspected, we do not believe that the economy will depart the low and stable regime. We have identified and then examined five key dynamics that we feel strongly will be instrumental in dictating price levels in the coming years. Below is a summary of our views on these dynamics:

It’s worth pointing out that even if inflation does drift into a higher range (e.g. 2%-4%), but remains stable, we do not think that will be overly problematic for the economy or financial markets. Indeed, over the long term, equities have earned strong returns as long as inflation remains below 6%.

In terms of our positioning, we are still overweight equities and underweight fixed income markets. At current interest rate levels, bonds are quite unattractive, and the risk of higher inflation only amplifies this. While equities are certainly not inexpensive from a valuation standpoint, we do think that the combination of strong earnings growth and low interest rates give equities a good chance of delivering solid returns.

The last 18 months have represented uncharted territory in markets, economies, and policy making, creating a series of fascinating dynamics that we continue to watch play out. While we certainly have a view on inflation and where it is headed, we are acutely aware of how quickly and meaningfully things can change. As the world evolves, we will be clear-eyed in updating our views on inflation and markets more broadly.

Please click on the Download PDF button to read the full whitepaper.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

There is no guarantee that any particular asset allocation or mix of strategies will meet your investment objectives.

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

The enclosed materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.