March 2022 Special Market Update

Mercer is closely following the events unfolding in Ukraine and we wanted to provide an update given the increased levels of volatility that global financial markets have been experiencing. We are extremely saddened to learn about Russia’s military aggression and the likely devastating humanitarian impact. Our thoughts and prayers are with the millions of Ukrainian people currently affected.

Risk assets (any asset carrying a degree of risk, such as stocks, commodities, and real estate) entered 2022 with rich valuations in spite of numerous challenges such as soaring inflation and tightening monetary policy. These challenges have acted as a headwind for financial assets. Inflation and rising interest rates, however, were within the economic scenarios economists typically lay out for markets. What is far less forecastable are the geopolitical conflicts with their inherently human nature, as we are currently witnessing between Russia and Ukraine. Compounding the economic with the geopolitical has contributed to year-to-date losses across both equities and fixed income.

Russia’s invasion of Ukraine has brought geopolitics to the forefront. While each geopolitical conflict is unique, including this one, the number of past events can teach us something about how markets respond to them. Even in the short two decades since the turn of the millennium, markets have faced 9/11, numerous military conflicts in the Middle East and Central Asia as well as instances of trade wars between the major powers. We cannot know how the conflict between Russia and Ukraine will play out, whether it will draw in other players, or how long it will last. However, by consideration of prior geopolitical events, and their impacts on markets, we may at least provide context on the possible impact of this event. History has shown us that sell-offs driven by geopolitics can be so short-lived that even clairvoyant investors may struggle to time them. Through these, we hope to help investors peer through the fog of market sentiment and stay the course during these times of geopolitically driven uncertainty.

Investors have good reason to wonder about investment implications when the news flow and market behavior is dominated by a geopolitical event. Not only do these events have the potential to cause farreaching outcomes for the global economy and financial markets, but their inherently human component creates a level of uncertainty that is difficult to properly account for. This is why geopolitical events can often be catalysts for volatility spikes in financial markets.

In light of the above, it is important for investors to stay restrained and not overreact. Positioning portfolios for the unfolding of geopolitical events while they are already developing requires an ability to see into the future. On balance, the attempt to position for geopolitical events at this stage in the crisis is more likely to lead to the selling of risk assets after markets have already discounted the event.

By using history to peer through the fog, for now, we suggest investors should prepare rather than predict and see through geopolitical turbulences while remaining vigilant of the situation. Mercer will continue to provide updates as needed as events develop.

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