Investors shifted their concern from the economic impact of Russia’s invasion of Ukraine to broader macroeconomic issues that are now weighing on markets.

In his latest letter to investors, Kevin Russell, chief investment officer of alternatives firm UBS O’Connor, wrote that while institutional investors are less concerned about the war this month, anxiety over “the economic conundrum” of ongoing inflationary pressures, tighter monetary policy and the risk of recession are now central concerns.

In March, Bank of America’s Global Fund Manager Survey found that about half of 200 global institutions, hedge fund managers and other investors thought the Russian-Ukrainian war was the biggest tail risk their portfolios were at. confronted. In April, Russell pointed out that BofA’s flagship survey found that figure had fallen to just 16% of respondents.

However, investor concerns about the potential for a global recession, hawkish central banks and inflation have risen significantly from last month.

“These risks are increasing and the risk of geopolitical military conflict is decreasing,” Russell said. Institutional investor.

Russell said the new fears translated into high-speed moves in interest rates, which in turn caused disruption to factors such as growth and significant underperformance.

Investors can be forgiven for not understanding the complexity of the current environment, Russell said. After all, a generation of investors didn’t have to think about the effect of inflation on asset prices, he said. (O’Connor is macro-risk agnostic: he doesn’t try to predict or position himself for as much as determining where risks are updated so that it can make capital allocation decisions.)

There are also new opportunities. “When it comes to credit spreads in the corporate market, we believe the worst of this volatility is behind us,” Russell said. “[Now] we are becoming more active in our portfolios, focusing a little more on growth sectors and buying bonds a little more actively – both investment grade and in the high yield market.

UBS O’Connor also sees potential opportunities in capital structure-driven strategies as investors adapt to new corporate realities and in merger arbitrage.

Yet investors are pessimistic about economic growth. BofA’s survey found that those expecting a strong economy are at an all-time low. Russell said, unsurprisingly, that this pessimism is partly caused by inflation and rising interest rates. But the CIO is surprised that the “feedback loop” is causing economic output to contract as high as it has ever been.

The CIO advised clients to take a longer-term global perspective.

“I think people are just aware of what the Fed is saying right now,” he said. It is difficult for investors to understand the Fed’s seemingly paradoxical position that there is both high inflation and the risk of recession.

“These are statements that don’t normally go together, and it’s hard for investors to reconcile them,” he added.

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