“We now know what we are dealing with: a protracted stand-off between Russia and the West. We also think it has reduced the risk of central banks slamming the brakes to contain inflation”

Taken from BlackRock Investment Institute‘s latest Weekly Market Commentary.

First look

Survey finds virtual underwriting embraced by LPs
One of the most notable changes forced on limited partners by the covid pandemic was the requirement to conduct fund manager due diligence remotely rather than in-person. Those who thought the trend would fade away in time may have to think again, according to a study from placement agent Capstone Partners.

Capstone found that virtually underwriting re-ups had become a completely normal part of LPs’ modus operandi, with only 9 percent of 130 global investors saying they had not used virtual processes to underwrite re-ups in 2021.

This applies even to new relationships with fund managers, with only 14 percent saying they would not underwrite a new fund commitment virtually, with the figure for North American LPs at just 3 percent. The least likely to back new fund manager commitments virtually are LPs based in Asia-Pacific, where 33 percent said they would not do so.

It’s notable how quickly sentiment changed. Capstone says that, in 2020, the picture was very different with 37 percent of global investors uncomfortable underwriting new managers remotely, and a figure of 80 percent for Europe and 82 percent for Asia-Pacific.

Most commitments in 2022 are expected to be in the form of re-ups, according to the survey, with plenty of large, blue-chip managers tipped to return to market. Sixty-nine percent of Asia-Pacific investors expect more than 60 percent of their commitments to be re-ups this year, compared with 62 percent in the US and 59 percent in Europe.

S&P explores consequences of Ukraine conflict
In an environment that was already looking volatile with inflationary pressures, rate rises and ongoing supply chain issues, along came the harrowing conflict in Ukraine. In a new report (log-in required), S&P Global Ratings wrestles with some of the likely outcomes from both a macro and credit perspective.

It will surprise few that, at the macro level, S&P is predicting “sustained inflationary pressures” as a result of higher energy, food and metal prices. Those already feeling the force of inflationary pressures as well as the tapering of US monetary policy – especially emerging markets – will experience a further drag on economic expansion.

“The sudden materialisation of this downside geopolitical risk tilts our current baseline sharply to the downside,” the report warns.

Looking at credit more specifically, S&P raises the prospect of “risk repricing that drives up borrowing costs or limits funding access for weaker borrowers” as well as “profit erosion for sectors that are energy intensive or rely on consumer discretionary spending”.

Of course, it’s still early days in a conflict that tragically appears to have a long way to run and certain consequences are likely unforeseeable. While acknowledging these limitations, our most recent Friday Letter explored some ways in which the conflict may have an effect, including on the actions of central banks.

Data snapshot