Nonprofit market outlook 2022: volatility erupts

Many nonprofit organizations, their grantees, and beneficiaries took advantage of strong markets in 2021. The first couple of months of 2022 brought us turbulent waters to navigate through and this could continue as volatility has erupted due to the attacks and turmoil in the Ukraine.

Other current considerations include inflationary pressures, Fed positioning on rising rates, and other geopolitical tensions like China’s posture toward Taiwan and negotiations with Iran. It’s a stark reminder that risk management is paramount to long-term institutional investors. As stewards of these important assets, it’s critical to keep an eye on the horizon by focusing on pre-determined risk profiles and policy allocations.

The global economy had expected to show another year of above average growth as we exit from pent up demand from COVID-19, albeit with injections of higher energy costs due to the recent conflicts, which may naturally thwart some of that projected growth. Fortunately, households in the United States and Europe are stronger than they have been in decades, and corporate profit margins have been at high levels, so the foundation going into this year is stronger relative to past years. But with a change in rates forthcoming, and inflation seemingly more sticky than transitory, what is the outlook of the investment community and how are portfolios being positioned to take advantage of these changing trends?

Some questions to consider include:

• Is value really turning this time? 
• How are international markets poised, relative to domestic?
• Investment grade fixed income is the risk management anchor in many portfolios—are you ready for periodic negative returns?
• Has your organization run stress tests for a more rocky scenario that results in a flight to quality where bonds could rally?

Answers to these questions are important exercises in defining our risk management process.