Russia’s invasion of Ukraine has sent shockwaves around the globe, leading to a devastating human cost, market volatility and economic uncertainty. As this is a developing and potentially escalating conflict, we anticipate that the geopolitical and economic effects will rapidly change.
Below is a summary of our investment team’s latest perspective on how the crisis is impacting our portfolios, Impax Asset Management Group, and the global investment outlook.
For our Listed Equity and Fixed Income strategies:
- Impax has no direct holdings in either Russian or Ukrainian equities or fixed income securities. We have also implemented a trade block on Russian and Belarusian securities across all products effective 10 March 2022. This block will be reviewed end September 2022.
- Direct revenue exposure to Russia and Ukraine in companies held within Impax strategies is very limited.
- The impact of the conflict has driven inflationary rises in the global prices of oil, gas and soft commodities. This has led to strong performance from names in the MSCI GICS Energy sector, to which Impax strategies have no exposure.
- There are potential secondary effects on Impax strategies from higher commodity prices:
- Impax expects the rising cost of energy and oil derivatives will impact companies to varying degrees depending on their hedging policies and ability to pass through higher input costs.
- Impax also expects this rise in input prices to drive an increased focus on energy efficiency as, longer-term, energy spikes tend to accelerate the shift to diversify and decarbonise.
- At the policy level, energy security concerns top the European political agenda and align with climate goals to increase the case for an accelerated shift away from fossil fuels. The EU has announced its plan to reduce dependency on Russian gas and oil based on strengthened targets and policy frameworks to encourage greater energy savings and the faster rollout of renewable energy in power generation, industry and transport.
- Rising global soft commodity prices tend to increase farmers’ income which can lead to greater demand for agricultural and irrigation equipment.
- Impax will position its strategies to take advantage of share price falls in companies where we believe they have been sold more on sentiment than for reasons relating to changes underlying earnings or long-term fundamentals.
For our Fixed Income strategies:
- The potential impact of the conflict on inflation and economic growth has mixed implications on the direction of interest rates:
- Yields on US Treasuries and other government bonds have risen sharply as central banks have taken action to stem soaring inflation. The Federal Reserve has repeatedly increased base interest rates in 2022 in response to inflationary pressures that have been accelerated by recent disruption to energy and food supplies. Short-term interest rates are expected to rise further in the US to combat higher inflation, but it is unclear whether interest rates will rise longer term given concerns about a slowing economy.
- At the same time, corporate bond spreads have widened meaningfully due to growing concerns about slowing economic growth and geopolitical uncertainty. Corporate spreads are now approaching their long-term averages, creating more attractive opportunities for investing in well-positioned companies.
- The potential economic drag from this invasion is likely to have longer-lasting repercussions on economic growth (most acutely in Europe, given the region’s substantial economic interdependence with Russia and Ukraine), which could constrain long-term interest rates and lend support to fixed income markets.
For our New Energy (private markets) strategies:
- The Impax New Energy Strategy has no exposure to Ukraine or Russia.
- In the short term, the effects of the conflict contribute to inflationary and supply chain pressures facing our construction projects. Offsetting these are higher energy prices in Europe.
- Longer term, Impax expects a sharper focus on energy security in Europe to accelerate the build-out of renewable energy infrastructure and the energy transition as a whole.
- It is now essential that governments adjust permitting processes which have been the bottleneck for a faster build-out of new renewable energy projects as the need to shift away from the reliance on Russia’s fossil fuels increases in priority.
- We are proud of our Polish partners at Greenfuture who continue to help Ukrainian refugees to find housing and work in Poland.
Impax Asset Management Group
We have undertaken a review of clients, suppliers and vendors to Impax Asset Management Group companies to confirm compliance with recently introduced sanctions and have found no areas of concern. Sanction screening is part of our regular onboarding process, and we will continue to develop our approach to encompass any new sanctions with regard to the conflict in Ukraine as they are announced.
We have donated to the British Red Cross’ Ukraine appeal and are matching colleagues’ personal donations to support humanitarian efforts for the people of Ukraine.
We are also mindful of the urgency of the need to set out the prospects for fossil fuel dependent economies within a lower carbon global economy, based on the challenges these countries face as the global economy weans itself off their natural gas and oil.
A fuller discussion on the climate implications of the conflict are available in our Chief Executive, Ian Simm’s article “Why market turmoil will not derail the Transition to a More Sustainable Economy” here.