Conflict in Ukraine adds to long term inflationary pressures and delivers increased volatility in markets

Executive Summary

• Global equities added to their 2022 losses during February, although collectively they fell by less than in January. Russia was unsurprisingly the worst-performing country: shares cratered, with the MSCI Russia Index down by 52.75% during the month, as its invasion of Ukraine invited sanctions from around the world that crippled its financial markets.
   
• Among major markets, the UK was the best performer with a small gain. Japan declined by less than Europe and the US, while Hong Kong and China had steeper selloffs. Value-oriented shares continued to fall by considerably less than their growth-oriented counterparts. Globally, the only equity sectors with positive performance were materials and energy.
   
• Government bond rates increased across all maturities in the UK, eurozone and US during February. Rates rose sharply thru mid-month before partially retreating during the second half of the month. Long-term US Treasury yields fell significantly in late February, flattening the Treasury yield curve.
   
• Emerging market debt plummeted during the month, most sharply within local-currency assets, and most other areas of fixed interest were also down. Inflation-indexed securities were positive.1 Commodity prices made a subdued advance for most of February before catapulting higher in the final days of the month (and into the beginning of March) as markets reacted to the implications of the unfolding conflict in Ukraine.
   
• It is SEI’s strong belief that the so-called ‘Great Rotation’ into value stocks is just beginning; the metrics SEI uses to identify its preferred alpha source positioning continue to point strongly towards a bias toward valuation-focused managers. SEI feels that looking forward there remains a lot of potential for this positioning, even after an already strong start to relative performance in 2022.
   
• This would be consistent with an economic outlook that reflects a view of a world that moves more meaningfully towards the exit of the Pandemic in 2022 and deals with the global fall-out from the conflict in Ukraine. The result of this is likely to be higher and more persistent inflation, increasing rates, increased levels of volatility, all of which would be favourable for the positioning in the SEI Strategic Portfolios.

Market Overview

• The Bank of England’s (BOE) Monetary Policy Committee (MPC) reconvened at the beginning of February for its first meeting since raising its bank rate in December 2021, and issued another increase for the first back-to-back rate hike in 18 years. A large minority of MPC members voted for a larger 50 bps increase to counteract high inflation.
   
• UK manufacturing growth edged upward in February, returning to the high side of the generally strong expansion that has prevailed over the last six months. UK services activity exploded in February after cooling to a more modest expansion in December and January.
   
• The UK claimant count (which calculates the number of people claiming Jobseeker’s Allowance) declined in December for the eleventh straight month, by roughly 32,000.
   
• The European Central Bank (ECB) also held its inaugural meeting of 2022 at the beginning of February, after which ECB President Christine Lagarde acknowledged that the widespread stress inflation has caused will likely continue over the short term.
   
• Manufacturing growth in the eurozone remained quite strong in February, expanding at roughly the same pace that it has been able to maintain since September. Eurozone services sector activity leapt to heathier growth levels in February after slowing to a relatively anaemic expansion in December and January.
   
• An early estimate of eurozone consumer price inflation measured 0.9% in February and 5.8% year over year, up from 0.3% and 5.1%, respectively, in January.
   
• The US Federal Open Market Committee (FOMC) did not hold a meeting in February. Federal Reserve (Fed) Chair Jerome Powell stated at the beginning of March that he believed a 0.25% increase in the fed funds rate would be appropriate at the FOMC’s mid-March meeting; if enacted, this would be the first FOMC rate hike since December 2018.
   
• The robust expansion of US manufacturing growth accelerated in February, after cooling in December and January, as new order growth jumped and employment growth slowed. Growth in the US services sector accelerated sharply in February after nearly pausing altogether in January.
   
• New US jobless claims moderated in February, ranging between 200,000 and 250,000 per week during the month. The broad US economy grew at a 7.0% annualised rate during the fourth quarter (up from a preliminary estimate and the third quarter’s 2.3% pace).

Selected Asset Class Commentary

• US High Yield Fixed Income Asset Class: The asset class gained from positive security selection within energy, consumer goods and services and basic industry. Meanwhile, selection within health care and telecommunication detracted. J.P. Morgan Investment Management outperformed due to selection within energy and telecommunications. Brigade Capital Management benefited from selection within basic industry and consumer goods. T. Rowe Price suffered from an underweight and selection within leisure. Ares Management registered weak performance from security selection within telecommunications and energy.
   
• Global Managed Volatility Equities Asset Class: During the month, the asset class’ favourable overweight to quality and value-oriented stocks enhanced performance. Strong stock selection within value contributed to returns. The asset class’ small-capitalisation bias and underweight to large-cap technology names also contributed. LSV Asset Management’s value-orientation and underweight to large-cap IT aided performance. LSV's low volatility exposure also contributed. Acadian Asset Management benefited from its low-volatility preference, which led to an underweight to low-quality stocks. Allspring Global Investments gained from its value-orientation and defensive positioning within consumer staples, utilities and health care. Allspring's underweight to large-cap technology names also contributed.
   
• Global Equities Asset Class: The asset class gained due to an overweight to value during the month. The asset class’ low volatility investing was generally favourable, while the allocation to quality stocks detracted. The building block’s overweight to financials and underweight to IT was helpful. Exposure to pharmaceuticals and banks detracted. Poplar Forest Capital, a US value manager, contributed due to the outperformance of value during the month. Metropole Gestion, a European value manager, underperformed due to headwinds to value investing in Europe. LSV Asset Management registered favourable performance during the month due to tailwinds from low volatility investing. LSV’s selection within consumer discretionary and underweight to large mega-cap stocks also contributed. Fiera Capital Corporation, a US quality manager, lagged during the month, suffering from weak stock selection within financials.

Manager Changes

• N/A

Outlook

• SEI expects a gain in overall US economic activity of around 4% in 2022, appreciably above the economy’s long-term growth potential of 2%. While Russia’s invasion of Ukraine has dimmed our expectations, SEI still believe other countries are capable of continuing to post above-average growth as they recover from the past two years’ worth of lockdowns and shortages.
   
• China’s performance in 2022 is one of the key unknowns that will influence global economic growth. Consensus expectations call for a soft landing of the Chinese economy, with gross domestic product (GDP) growing by about 5% in 2022 versus 8% in the past year.
   
• The year ahead promises to be another one of tight labour markets. We think more people will return to the workforce as COVID-19 fears fade, but there likely will still be a tremendous mismatch of demand and supply. US wage gains have climbed at their fastest pace in decades over the past year.
   
• Predicting a bad inflation outcome for 2022 isn’t exactly much of a risk. Where SEI departs from the crowd on inflation is in the years beyond 2022. SEI is sceptical that the US Fed will be sufficiently proactive as it struggles to balance full and inclusive employment against inflation pressures that are starting to look more entrenched. SEI believes this will be the central bank’s biggest challenge in 2022 and beyond.
   
• SEI also doesn’t think the Fed’s inflation and economic projections are internally consistent. Since it projects the economy to be even closer to full employment later into 2022 and beyond, we find it hard to understand why price pressures should ease so dramatically.
   
• Even the central banks that are most likely to taper their asset purchases and raise policy rates in the months ahead will probably do so cautiously. By contrast, policy rates in emerging economies have already jumped.
   
• It remains to be seen whether this pre-emptive tightening of monetary policy will forestall a 2013-style taper tantrum as the Fed embarks on its own rate-tightening cycle.
   
• The People’s Bank of China (PBOC) cut a key interest rate in December and then again in January, both by modest amounts. These cuts followed a reduction in reserve-requirement ratios aimed at increasing the liquidity available to the economy; it will take a while for any beneficial impact to be felt on China’s domestic economy, and even longer for the world at large.
   
• In addition to the start of a new monetary tightening cycle, some economists have expressed concern about the next “fiscal cliff” facing various countries, the US in particular. While there will be a negative fiscal impulse in the sense that the extraordinary stimulus of the past two years will not be repeated, we argue that the impact should be less contractionary than feared.
   
• Perhaps economists should be more concerned about the negative fiscal impulse in the UK, Canada, Germany and Japan. They are all facing a potential fiscal tightening equivalent to 4% of GDP this year. By comparison, the International Monetary Fund predicts that the cyclically adjusted deficit in the US will contract by less than 0.5% of GDP.
   
• Investors always need to deal with uncertainty; SEI is focused on three main areas of geopolitical risk. We have been stressing since the beginning of the year that the Russian invasion of Ukraine was the most important flashpoint in terms of near-term probability and economic impact.
   
• Next is the ongoing tug-of-war for influence and military advantage between China and the US. The most worrisome flashpoint would be over Taiwan given its dominant position in advanced semiconductor manufacturing.
   
• The third major area of concern is the Middle East and the negotiations with Iran over its nuclear development program. Two things are clear: Iran is now much closer to having a nuclear bomb, and Israel still will not tolerate such a major change in the region’s balance of power. The risk of war may be low, but developments continue to head in a direction that could someday have catastrophic consequences.
   
• In SEI’s view, the real anomaly in the financial markets is the ultra-low levels of interest rates in the face of higher inflation and above-average growth in much of the world. This may force central banks to adopt more aggressive interest-rate policies than they and market participants currently envision.
   
• SEI urges our investors to look past the challenging relative returns of the 2019 and 2020 period and notice how the positioning has started to play out much better in 2022. Inflation, rising rates, potential increased levels of regulation around big tech, increased levels of market volatility are all themes that are likely to support the positioning in the underlying asset class components. Terrible as the conflict in the Ukraine is, this event further supports the positioning in the SEI Strategic Portfolios.
   
• It is SEI’s view that this positioning will not only continue to provide downside protection as the market rotates away from growth stocks where the growth story is fading rapidly and is more volatile due to the conflict in Ukraine, but also provide relative performance benefits as we move into a post-Covid economic recovery.

Important Information on Performance

Past Performance is not a reliable indicator of future results. Standardised performance is available upon request. All data is as at 28 February 2022.

Asset class performance discussed is based on the majority SEI fund underlying the asset class. This does not include analysis of the manager pools, hedged share class investments within SEI Funds, additional SEI funds or any third-party funds within the Strategic Portfolios. As a result, performance for the total asset class allocation may vary. Not all asset classes discussed are included in all Strategic Portfolios. All asset class comparative performance is relative to the benchmark of the specific SEI fund representing the majority of the asset class investment.

Important Information

This material is not directed to any persons where (by reason of that person’s nationality, residence or otherwise) the publication or availability of this material is prohibited. Persons in respect of whom such prohibitions apply must not rely on this information in any respect whatsoever. Investment in the funds or products described herein are available only to intended recipients and this communication must not be relied or acted upon by anyone who is not an intended recipient.

Whilst considerable care has been taken to ensure the information contained within this document is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information.

The SEI Strategic Portfolios are a series of the SEI Funds and may invest in a combination of other SEI and Third-Party Funds as well as in additional manager pools based on asset classes. These manager pools are pools of assets from the respective Strategic Portfolio separately managed by Portfolio Managers which are monitored by SEI. One cannot directly invest in these manager pools.

SEI Investments (Europe) Limited acts as distributor of collective investment schemes which are authorised in Ireland pursuant to the UCITS regulations and which are collectively referred to as the “SEI Funds” in these materials. These umbrella funds are incorporated in Ireland as limited liability investment companies and are managed by SEI Investments Global, Limited, an affiliate of the distributor. SEI Investments (Europe) Limited utilises the SEI Funds in its asset management programme to create asset allocation strategies for its clients.

Reference in this document to any SEI Funds should not be construed as a recommendation to buy or sell these securities or to engage in any related investment management services. Recipients of this information who intend to apply for shares in any SEI Fund are reminded that any such application must be made solely on the basis of the information contained in the Prospectus (which includes a schedule of fees and charges and maximum commission available). Commissions and incentives may be paid and if so, would be included in the overall costs.

A copy of the Prospectus can be obtained by contacting your Financial Advisor, SEI Relationship Manager or using the contact details below.

Investments in SEI Funds are generally medium to long term investments. The value of an investment and any income from it can go down as well as up. Fluctuations or movements in exchange rates may cause the value of underlying internal investments to go up or down. Investors may not get back the original amount invested. SEI Funds may use derivative instruments which may be used for hedging purposes and/or investment purposes. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events.

The risks described below may apply to the underlying assets of the products into which the Strategic Portfolios invest:
Investment in equity securities in general are subject to market risks that may cause their prices to fluctuate over time.

• Fixed income securities are subject to credit risk and may also be subject to price volatility and may be sensitive to interest rate fluctuations.
• Absolute return investments utilise aggressive investment techniques which may increase the volatility of returns. If the correlation between absolute return investments and other asset classes within the fund increases, absolute return investments’ expected diversification benefits may be decreased.
• International investments may involve risk of capital loss from unfavourable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.

The Funds are denominated in one currency but may hold assets priced in other currencies. The performance of the Fund may therefore rise and fall as a result of exchange rate fluctuations.

This information is issued by SEI Investments (Europe) Ltd (“SIEL”), 1st Floor, Alphabeta, 14-18 Finsbury Square, London EC2A 1BR. This document and its contents are directed only at persons who have been classified by SIEL as a Professional Client for the purposes of the FCA Conduct of Business Sourcebook. SIEL is authorised and regulated by the Financial Conduct Authority. 

SEI sources data directly from FactSet, Lipper, and BlackRock, unless otherwise stated.



























Important Information on Performance

Past Performance is not a reliable indicator of future results. Standardised performance is available upon request. All data is as at 31 January 2022.

Asset class performance discussed is based on the majority SEI fund underlying the asset class. This does not include analysis of the manager pools, hedged share class investments within SEI Funds, additional SEI funds or any third-party funds within the Strategic Portfolios. As a result, performance for the total asset class allocation may vary. Not all asset classes discussed are included in all Strategic Portfolios. All asset class comparative performance is relative to the benchmark of the specific SEI fund representing the majority of the asset class investment.

Important Information

This material is not directed to any persons where (by reason of that person’s nationality, residence or otherwise) the publication or availability of this material is prohibited. Persons in respect of whom such prohibitions apply must not rely on this information in any respect whatsoever. Investment in the funds or products described herein are available only to intended recipients and this communication must not be relied or acted upon by anyone who is not an intended recipient.

Whilst considerable care has been taken to ensure the information contained within this document is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information.

The SEI Strategic Portfolios are a series of the SEI Funds and may invest in a combination of other SEI and Third-Party Funds as well as in additional manager pools based on asset classes. These manager pools are pools of assets from the respective Strategic Portfolio separately managed by Portfolio Managers which are monitored by SEI. One cannot directly invest in these manager pools.

SEI Investments (Europe) Limited acts as distributor of collective investment schemes which are authorised in Ireland pursuant to the UCITS regulations and which are collectively referred to as the “SEI Funds” in these materials. These umbrella funds are incorporated in Ireland as limited liability investment companies and are managed by SEI Investments Global, Limited, an affiliate of the distributor. SEI Investments (Europe) Limited utilises the SEI Funds in its asset management programme to create asset allocation strategies for its clients.

Reference in this document to any SEI Funds should not be construed as a recommendation to buy or sell these securities or to engage in any related investment management services. Recipients of this information who intend to apply for shares in any SEI Fund are reminded that any such application must be made solely on the basis of the information contained in the Prospectus (which includes a schedule of fees and charges and maximum commission available). Commissions and incentives may be paid and if so, would be included in the overall costs.

A copy of the Prospectus can be obtained by contacting your Financial Advisor, SEI Relationship Manager or using the contact details below.

Investments in SEI Funds are generally medium to long term investments. The value of an investment and any income from it can go down as well as up. Fluctuations or movements in exchange rates may cause the value of underlying internal investments to go up or down. Investors may not get back the original amount invested. SEI Funds may use derivative instruments which may be used for hedging purposes and/or investment purposes. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events.

The risks described below may apply to the underlying assets of the products into which the Strategic Portfolios invest:
Investment in equity securities in general are subject to market risks that may cause their prices to fluctuate over time.

• Fixed income securities are subject to credit risk and may also be subject to price volatility and may be sensitive to interest rate fluctuations.
• Absolute return investments utilise aggressive investment techniques which may increase the volatility of returns. If the correlation between absolute return investments and other asset classes within the fund increases, absolute return investments’ expected diversification benefits may be decreased.
• International investments may involve risk of capital loss from unfavourable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.

The Funds are denominated in one currency but may hold assets priced in other currencies. The performance of the Fund may therefore rise and fall as a result of exchange rate fluctuations.

This information is issued by SEI Investments (Europe) Ltd (“SIEL”), 1st Floor, Alphabeta, 14-18 Finsbury Square, London EC2A 1BR. This document and its contents are directed only at persons who have been classified by SIEL as a Professional Client for the purposes of the FCA Conduct of Business Sourcebook. SIEL is authorised and regulated by the Financial Conduct Authority.

SEI sources data directly from FactSet, Lipper, and BlackRock, unless otherwise stated.