The Implications of Global Instability and Financial Uncertainty
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Volatility: Russia, Resiliency and Repositioning
The Implications of Global
Instability and Financial
Uncertainty
FEBRUARY 2022
With geopolitical influences converging with inflation and other macroeconomic
factors, it appears that volatility could be front and center for the foreseeable
future. When facing volatility in the market, it is crucial to gather a full
understanding of the issues at hand so you can better prepare your investment
portfolios. At New York Life Investments, we partnered with leading experts to
dissect the recent volatility and paired their perspectives with commentary from
John Sitilides our boutiques to provide you with a holistic view on the market today.
Principal
Trilogy Advisors
Risks on Multiple Fronts
John Sitilides
Principal
Trilogy Advisors
We are currently witnessing the historically unprecedented convergence of risks
involving geopolitical instability, inflation, and the global COVID-19 pandemic. The
United States remains focused on preventing any single power from dominating
Chris Watling Europe, as well as in Asia and the Middle East. Russia has expressed its strategic
Founder concerns about NATO’s eastern expansion over the past two decades, and now
Longview Economics seeks to re-establish Ukraine as a massive land buffer between alliance members
and its own western borders. The large ethnic Russian population in Ukraine serves
as Vladimir Putin’s pretext for seeking to unite Ukrainians and Russians as a single
civilizational family that transcends national borders. This was the stated basis for
Russia’s 2014 annexation of Ukraine’s Crimea peninsula and its military control since
then of Ukraine’s southeastern provinces. However, the number of Russian troops
surrounding Ukraine in Russia and Belarus are insufficient for a massive invasion
across Ukraine, despite the media frenzy of late. Mimicking Beijing’s effective “sliced
Dr. Kevin Elko salami” approach since 2014 to build military bases on artificial islands throughout in
Performance Coach the South China Sea, Moscow will likely undertake low-level military operations that
incrementally undermine Ukrainian sovereignty at a threshold that avoids triggering a
NATO military response. A more likely scenario involves Russian-directed grey-zone
hybrid war strategy consisting of cyberattacks to spread panic among the population
and distract authorities. Russia could target critical infrastructure such as power
The Implications of Global Instability and Financial Uncertainty plants, mobile communications, internet, government communications, and transportation systems, to further destabilize and demoralize Ukrainian society and psychologically exhaust the military and law enforcement under constant high threat level, without crossing a NATO military response tripwire. This would drive a deeper wedge between the U.S. and the U.K., which are more supportive of Kyiv, and NATO members such as Germany and France seeking a more diplomatic approach to Russian adventurism in Europe, especially given their growing energy dependence on Russian supplies. Another plausible scenario involves a Russian naval takeover of Ukraine’s tiny but strategically located Snake Island in the Black Sea, effectively controlling the Ukrainian economy by restricting access to its Black Sea shipping corridors. Given the importance to Xi Jinping of a successful Beijing Olympiad, Moscow is not expected to push further in Ukraine until the games have concluded. After Feb. 20, Moscow may begin conducting a series of rolling operations that it can start and stop at any time of its own choosing, on land and at sea, depending on U.S., European and international reaction. From Emergency Policy to Normalcy Chris Watling Founder Longview Economics Inflation is at 7%. That’s the highest it’s been since 1982. This is not, though, the beginning of a recessionary phase, despite the fears of the bears. Indeed, there are many differences between previous recessions and this current climate (in particular, the U.S. economy is structurally strong with an absence of economic excess). More importantly, the U.S. central bank is beginning the journey of policy normalization (not tightening). For most of 2020 and 2021, the U.S. economy has been guided by emergency policy actions enacted to combat the COVID-19 pandemic. Those emergency policies resulted in a great deal of money being printed and effectively, via stimulus and furlough programs, given to consumers and businesses. The global supply chain, as a result, couldn’t keep up with the extra spending created by the extra cash, thereby causing vacancies on store shelves. Along with newly created cash flowing largely unrestricted, speculative investments became overinflated. Tech stocks and cryptos were beneficiaries of those money flows, causing them to have the hardest falls as money began to tighten. Some cryptocurrencies are down sharply from their all-time highs, while a high number of tech companies are at 52-week share price lows. The rise and manipulation of the now-famous “meme stocks” was another telling example that money was flowing unchecked. The Fed, though, is now tightening and will continue to do so. As such, long duration and tech stocks are coming under pressure. If no shocks arise, the world’s economies should return to a more manageable and regular growth rate, and inflation will decrease. We believe that a return to a more normal monetary policy and a more normal global economy will fuel a rebound and drive what we label the “Great Rotation.” This rotation is a global repositioning of investments from those “negatively affected by normal policy to those that benefit.” Our family of Boutiques share their insights on how to move forward in the current uncertainty Our multi-boutique business model is built on the foundation of a long and stable history, which gives our clients proven performance managing risk through multiple economic cycles. With capabilities across virtually all asset classes, market segments and geographies, our family of specialized, independent boutiques offer deep domain expertise and diversity of thought, generating deeper insights alongside strong conviction to deliver better outcomes. We asked our seasoned specialists two simple questions about today’s economic environment, and here is what they had to say.
The Implications of Global Instability and Financial Uncertainty
Boutique How concerned are you about inflation What is your highest-conviction
and volatility over the next 12 months? investment idea related to your asset
class and inflation?
MacKay Inflation is expected to increase due to rising In 2022, we continue to expect advanced
Shields wages, housing costs and capital spending on economies to expand at an above-trend
renewable energy. rate. However, higher inflation and tighter
Global Fixed financial conditions suggest this cycle is
Despite reductions in supply-chain issues and
Income Team highly unlikely to approach the length of the
productivity improvements, it is unlikely that
prior one. Against this backdrop, we are
inflation will return to pre-COVID-19 levels.
looking at opportunities in the structured
credit markets as an important diversifier.
Importantly, two key metrics—the household
obligation ratio and household debt to net
worth—have fallen to their lowest levels in
40 years, suggesting consumers remain in
great financial shape and have room to pay
down debt.
Wages have been climbing higher for most
participants in the labor market, while
rising home prices coupled with strong
underwriting standards should generally
support mortgage-related debt instruments.
NYL We expect prices of finished goods and We continue to be constructive on floating
Investors services to remain sticky despite transitory rate and believe our focus on higher credit-
inflation in commodities. quality loans should be beneficial in 2022,
since lower-quality loans are currently priced
The Fed is expected to take a hawkish
at or near their peak historical level. We have
position in combating inflation; therefore,
seen in prior periods that once lower credit-
we are not overly concerned about the
quality loans reach their peak level, they
market impacts.
typically underperform the broader market.
While we think the fundamental credit-
environment is positive for non-investment-
grade credit (i.e., high-yield bonds and
bank loans), our view is that at current price
levels, lower-quality floating-rate loans (CCC
and below rated) have little upside. So, we
will continue to focus primarily on higher
credit-quality (BB and B rated) loans. With
asset prices at generally high levels, we view
2022 as more of a “coupon clipping” year,
which history has shown to better favor
our approach.
The Implications of Global Instability and Financial Uncertainty
Boutique How concerned are you about inflation What is your highest-conviction
and volatility over the next 12 months? investment idea related to your asset
class and inflation?
CBRE Although we are concerned about inflation, In real estate, we continue to have
Investment the real assets, which we manage, historically overweights to residential, storage and
Management has been protected against inflationary effects. hotels, which reprice often and should see
During past high inflationary periods, real vast improvements in cash flow in 2022
estate has outperformed equities. Property and 2023.
values rise alongside raw materials and labor,
In listed infrastructure, we have increased
giving REITs inflation protection.
exposure to global transports by several
Infrastructure companies pass costs to end hundreds of basis points over the past year.
users, while global utilities can increase We believe global transports, such as freight,
their regulated asset base and increase rail, and toll roads, have a rapid ability to
construction costs. Communications and reprice to outpace inflation. In our view they
Transports often negotiate contracts with may also benefit from a continued reopening
inflationary provisions. of the global economy. We also favor assets
that have efficient inflation pass-through, like
European towers (inflation- linked contracts)
and select regulatory jurisdictions that enable
quick recovery from inflation in revenues
and costs.
Wellington The impact of wage and shelter inflation is We take a balanced approach to portfolio
Management being underestimated, and we believe inflation construction, not leaning too heavily on
will be higher and more persistent. The any one scenario, but as we enter an
magnitude and pace of tightening measures inflationary environment, we are focused
are crucial to market health. on understanding the pricing power and
interest-rate sensitivity of the companies
we own.
Our largest sector overweights are
information technology, health care and
financials, while we remain underweight
consumer staples. (As of 12/31/21)The Implications of Global Instability and Financial Uncertainty
Boutique How concerned are you about inflation What is your highest-conviction
and volatility over the next 12 months? investment idea related to your asset
class and inflation?
MacKay MacKay Municipal Managers (MMM) In 2022, we believe structure matters as
Municipal anticipated heightened volatility in 2022 municipal investors must contend with the
Managers and while commencing sooner than some longer duration and Market Discount Rule
may expect, this is materializing. We believe impact of lower-coupon bonds (2-3%)
this further underscores the case for active where their issuance has risen from 16.1%
management, we see bouts of volatility as an to 29.8% over the last approximately five
opportunity, and we believe portfolios should years. In our view, investors modifying their
be prepared to pivot and capitalize. strategy to incorporate structure decisions
could discover new modes of potentially
We believe municipal bonds serve as an
generating excess returns.
inflation hedge when looking at core revenues,
much of which stems from increasing income In a landscape where many take a passive
tax, property tax, and sales tax collections. approach to municipal bond investing
There are also segments of the municipal and more lackluster returns in 2022 are
market, such as tobacco and toll roads, expected, we believe elevated tactical
that incorporate annual inflation adjustments trading drives returns. Volatility in 2022
in their covenants that increase revenues has already picked up, and in our view
available to debt service. MMM’s active approach, coupled with a
disciplined liquidity management profile
(cash reserves, no mutual fund leverage,
more modest non-rated bond exposure),
positions the team well to capitalize. In our
view, traditional passive municipal investors
shifting to tactical active management in
2022 may improve outcomes.
Winslow Inflation and volatility over the next 12 months We commit to high-quality, growth
Capital are, in our opinion, an opportunity. Investors companies that can compound their
Management, have recently sold off equities at the fastest long-term earnings and free cash flow at
LLC.
pace since March 2021. Major indices are rates well above the broader market. These
Large Cap either in correction or nearing bear markets companies also have the pricing power to
Equity amid increasingly hawkish Fed policy. The pass along rising input costs.
Manager severity of this sell-off is concealed by the
S&P 500’s drawdown of -11%, due to
its significant bond-proxy/low-vol stock
exposure. The average stock in the Nasdaq
Composite is down nearly 50% from its
highs. For these reasons, the stock market
is not only in correction, but also already in
bear market territory without a recession in
sight. In our opinion, this market sell-off is
overdone, and we see a bullish setup looking
ahead. We believe growth equities are a
structurally advantaged asset class due to
the compounding of their superior earnings
potential over time.The Implications of Global Instability and Financial Uncertainty
Boutique How concerned are you about inflation What is your highest-conviction
and volatility over the next 12 months? investment idea related to your asset
class and inflation?
Epoch Twelve months ago, the consensus believed We believe investors should be thinking
Investment inflation would be 2.3% at the end of 2021. It about the risk in their portfolios from holding
Partners, Inc. ended up being more than twice that. One key long-duration equities in a rising interest-
driver was aggressive policy stimulus (both rate environment. Shareholder yield is an
monetary and fiscal) implemented to combat indicator of short duration. Stocks that have
COVID-19’s impact on the global economy, substantial, present-day cash flows and are
allowing for a much faster economic recovery paying dividends have shorter duration and
than initially expected. While the demand should be less affected as interest rates
surge meant the recession was short-lived, move higher. As interest rates normalize, we
the supply-side disruptions were much believe shareholder yield is well positioned
more pervasive than anyone had expected. to succeed.
Consumer spending on durable goods initially
plummeted with the COVID-19 recession but
is now running 26% above trend; therefore,
companies are having a difficult time keeping
up. Supply disruptions also explain why
core-goods inflation is printing over 10% YoY
(vs its historical mean of 0%). It is affecting a
wide range of sectors and could certainly take
two years to normalize. Although consensus
expects core PCE inflation to decline to 2.3%
by the end of 2023, we believe the balance
of risks to this inflation trajectory are tilted to
the upside.
“Use your mind or lose your mind” – Dr. Kevin Elko
Successful Strategies Will Prevail
Dr. Kevin Elko
Performance Coach
Resiliency is needed in such unprecedented times. Rebounding after a setback and landing in an even better
place is the hallmark of a winner. To understand the process of winning, deconstructing the methods of proven
winners is critical. Tom Brady starts and concludes every game in the same manner. He views himself as a winner
and therefore acts like one. How you see yourself will dictate how you interpret your course of action. When the
weak are merely coping, the best are advancing. During these trying times, ask yourself “So what. Now what”?
Take each day as a one-off. Be 1-0 today, 1-0 tomorrow, and the victories add up.In Conclusion
At New York Life Investments, we don’t just offer investment advice, we invest in lasting relationships with
our clients. We’re a global asset manager with a focus on long-term thinking and a diverse multi-boutique
structure that you access through MainStay Funds and IndexIQ ETFs. We strive to provide investment
solutions that help you deliver meaningful outcomes for the clients you serve, and we work hard to deliver
value beyond just investment performance. When you truly understand your client, you can serve them
better—that’s what makes us different.
Long-lasting focus. Domain expertise. Relationship-driven.
More than investing. Invested.
For more information
800-624-6782
newyorklifeinvestments.com
Speaker bios
John Sitilides
Principal
Trilogy Advisors
John is a Washington D.C. geopolitical strategist, government affairs specialist, and diplomacy coordinator to the
U.S. Department of State (under contract). He shares his insights into U.S. and global risk trends, international
threat assessments, and geopolitical strategies through customized briefings designed to explore the complex
political and geo-economic decisions that impact global markets.
Chris Watling
Founder
Longview Economics
Chris founded Longview Economics in 2003 with a desire to produce research that was independent,
courageous, and relevant to every type of investor. Longview has built relationships across the globe and is
constantly seeking to deliver cutting edge market analysis and trading ideas.
Dr. Kevin Elko
Performance Coach
Dr. Elko is a performance and career-enhancement consultant, nationally renowned sport performance
consultant, keynote speaker and best-selling author. He received his bachelor’s degree in biology education and
coaching from California University of Pennsylvania. He received two master’s degrees and a doctorate at West
Virginia University and was later inducted into West Virginia University Hall of Fame. Dr. Elko focuses on helping
Fortune 500 organizations in the areas of Leadership, Goal Setting & Performance. With unparalleled energy, he
highlights the incredible power of resiliency as well as teaches his unique solution to becoming a champion in life
and in business.The Implications of Global Instability and Financial Uncertainty Consider the Funds’ investment objectives, risks, charges and expenses carefully before investing. The prospectus, or summary prospectus, and the statement of additional information include this and other relevant information about the Funds and are available by visiting IQetfs.com or by calling 800-624-6782 for MainStay Funds®. Read the prospectus carefully before investing. Disclosure Credit Quality: Percentages are based on fixed-income securities held in the Fund’s investment portfolio and exclude any equity or convertible securities and cash or cash equivalents. Ratings apply to the underlying portfolio of debt securities held by the Fund and are rated by an independent rating agency, such as Standard and Poor’s, Moody’s, and/or Fitch. If ratings are provided by the rating agencies, but differ, the lower rating will be utilized. If only one rating is provided, the available rating will be utilized. Securities that are unrated by the rating agencies are reflected as such in the breakdown. Unrated securities do not necessarily indicate low quality. S&P rates borrowers on a scale from AAA to D. AAA through BBB represent investment grade, while BB through D represent non-investment grade. The views expressed herein are from MacKay Shields, NYL Investors, CBRE Investment Management, Wellington Management, Winslow Capital Management, LLC, Epoch Investment Partners, Inc. and do not necessarily reflect the views of New York Life Investment Management LLC or its affiliates. New York Life Investments engages the services of affiliated, federally registered investment advisors such as MacKay Shields LLC and NYL Investors LLC, and unaffiliated, federally registered investment advisors, such as CBRE Investment Management, Wellington Management, Winslow Capital Management, LLC, Epoch Investment Partners, Inc. The products and services of New York Life Investments’ boutiques are not available to all clients and in all jurisdictions or regions. Investing involves risk, including possible loss of principal. Asset allocation and diversification may not protect against market risk, loss of principal, or volatility of returns. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors, and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. No representation is being made that any account, product, or strategy will or is likely to achieve profits. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. You should consult your tax or legal advisor regarding such matters. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The views expressed herein are from John Sitilides of Trilogy Advisors and do not necessarily reflect the views of New York Life Investment Management LLC or its affiliates. John Sitilides, nor Trilogy Advisors, are affiliated with New York Life Insurance Company or its subsidiaries. The views expressed herein are from Longview Economics and do not necessarily reflect the views of New York Life Investment Management LLC or its affiliates. Longview Economics is not affiliated with New York Life Investment Management LLC. This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any particular issuer/security. The views expressed herein are from Dr. Kevin Elko and do not necessarily reflect the views of New York Life Investment Management LLC or its affiliates. Dr. Elko is not affiliated with New York Life Investment Management LLC. New York Life Investments is both a service mark, and the common trade name, of certain investment advisors affiliated with New York Life Insurance Company, New York, New York 10010. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. NYLIFE Distributors LLC is a Member FINRA/SIPC. 1928134 MS74y-02/22
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