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Assuming a Short-lived Ukraine Conflict, Niziolek Positions CNWIX for Growth as the Rest of the World Re-opens

The afternoon after Russia launched a full scale invasion into Ukraine, Calamos Co-CIO and Head of Global Strategies Nick Niziolek used the previously scheduled CIO Call to provide his thoughts on the extremely fluid situation, its impact on the markets, the China Taiwan question and emerging markets opportunities going forward. He also expressed his sympathy for the suffering of the Ukranian people. Listen to the call in its entirety here.

Niziolek, Senior Co-Portfolio Manager of Calamos Evolving World Growth Fund (CNWIX), said the fund had no exposure to Russia. “Russia is less than 2% of the emerging market benchmarks. It’s a significant country, it was more significant six months ago before the declines we saw but it’s not a market we need to be exposed to.”

He noted two major developments:

  • To Niziolek on the first day of the invasion, a negotiated surrender instead of a “multi-month bloody conflict with significant supply disruptions” appeared to be the likely result. That outcome—resulting in Ukraine “becoming a puppet nation like Belarus”—would be more palatable to the markets, he said.
  • President Joe Biden’s statement Thursday, which did not go so far as to remove Russia from the SWIFT financial payments system or cut off its oil and gas supply.

“My base case is that Russia is able to swiftly take control of Ukraine, perhaps claiming victory as soon as early next week. I’m optimistic that it ends there,” Niziolek said.

“The best case is that the maps are going to look different, the trust and risk premium will be different.” But for as much as this crisis is consuming the world’s attention, the direct economic impact to the global economy is minimal beyond the effect it may have on the supply of energy and commodities, according to Niziolek. The European re-opening and recovery can continue in the months ahead, albeit with potentially higher energy costs and inflationary pressures. Asia and US will feel it even less.

Niziolek expects Russian equities to bounce from yesterday's lows. While it could be an attractive short-term trade, the damage has been done, given the greater risk premium and uncertainty. “The medium term outlook for Russia is not positive,” he said. “We’ll continue to stay on the sidelines…Russia is a place that has a lot of exposure to energy and materials, we can get that in other markets and through other companies.”

He also weighed in on China’s intentions with Taiwan and the risk of conflict there, describing himself as skeptical about predictions that China will use this as an opportunity to take control of Taiwan.

The narrative, he acknowledged, is that Xi’s “reunification” of Taiwan would be a significant success, serving to justify a third term for the leader. Even so, that’s not what Niziolek expects.

“In order for China to take control of Taiwan in short order, it would definitely have to be a hot conflict, a very devastating conflict. What would be left in Taiwan would be an island that would be decimated and all the manufacturing and technology that exists in Taiwan would be damaged, along with the sanctions and additional technology controls.

“I don’t think that’s what China wants, China wants a prosperous Taiwan to be part of China,” said Niziolek.

Ukraine-related disruptions in energy and commodities wouldn’t compare to a global disruption to semiconductors, if the Chinese were to invade Taiwan. As the team has said repeatedly, “chips are the new oil,” with almost every segment of the economy dependent on the technology.

If a takeover were to be forced, “I’d be really worried about global equities not just emerging markets or Taiwan because there are a lot of knock-on effects there,” said Niziolek. Any disruption in supply from Taiwan would likely set the world back technologically several years, and chip shortages could take decades to alleviate.

Instead, Niziolek looks for China’s assimilation of Taiwan to take place over years, following the Hong Kong model.

Growth Differentials to Shift to EM from DM

The call also included Niziolek’s review of 2021. He offered two reasons for the derailment of emerging markets’ recovery last year:

  • The additional waves of Covid variants in EM, which were significantly behind in vaccination efforts and medical support.
  • The tightening by China, which was not anticipated. It was a surprise, Niziolek said, that the Chinese leadership used the economy’s strength in 2020 to focus on some of the excesses that had been building (e.g., the property sector and the regulatory environment around digital payments and finance).

    “Tighter monetary conditions, tighter liquidity conditions and not much in the way of fiscal support led to a difficult environment to be invested in Chinese equities, which has knock-on effects throughout EM,” he said.

Watch for the Dollar to Weaken

On the day of the call, the US dollar was having a strong day, representing a flight to safety. However, Niziolek sees the dollar weakening over the next 12-18 months, influenced in part by the growth differentials expected this year.

“The US economy is still expected to be resilient but slowing down from some high base effects. Meanwhile, overseas the opposite is occurring. You’re seeing growth accelerating, a re-opening happening.

“With those growth differentials and based on where the dollar’s been, the bid it’s received in recent quarters due to uncertainty and on its safe haven status, my view is that we’re still in a longer term down cycle. This has just been another counter trend rally that we’ve seen in the dollar and ultimately it will be weaker from here."

Niziolek continued, “I don’t think you need the weak dollar to own emerging markets assets, there could be environments where the dollar is stable and emerging markets do quite well. A strong dollar tends to be difficult because it takes away some of the liquidity for the market and can serve as a headwind to returns. In a stable or weaker environment, EM tends to outperform developed markets. I’m optimistic that trend holds, the dollar is weaker and that’s another tailwind to the asset class."

Assuming the Ukraine crisis abates in the next few weeks, more favorable conditions could lead to a tipping of the economic growth differentials away from developed markets and toward emerging markets this year, according to Niziolek. “If you look at the pick-up in growth, the pick-up in inflationary pressures, and the supply/demand dynamics of energy and commodities, that all favors the EM asset class, which benefits from higher commodity prices,” he said.

Niziolek and team expect the re-opening of Asian economies—including the Philippines, Australia, Indonesia, Thailand—to continue on track.

A “living with Covid policy” is creating opportunities for the team to invest in airports, airlines, hotels, travel, dining and leisure equities that are seeing a resumption of demand, similar to what the US experienced starting later in 2020. The re-opening is also leading to small cap and mid-cap opportunities that provide regional exposure.

“That’s where the fund’s size has really been beneficial as our fund is still reasonably sized and we have the flexibility to move up and down the cap structure as we see opportunity,” he said.

At the same time, China has pivoted in its policies. Now the team’s expectation is that China will introduce more easing and more fiscal stimulus, with regulatory tightening posing less of an economic headwind. While it’s widely believed that China will stick to its “zero Covid” policy through March 2023, Niziolek is more optimistic—he thinks the policy could be lifted as early as mid-summer.

For more than two years, the Chinese consumer has been restricted from leaving their country, and there is significant pent-up demand “waiting to be unleashed,” he said.

“We’ve been taking positions to get exposed to that in Chinese travel companies, Macau casinos and hotels but we’ve been doing it in structures where we’ve got more defensiveness, more downside preservation and a longer time horizon.

“My confidence about whether that really happens in six months or nine months is not extremely high,” he added. “Everyone’s telling me that it’s probably going to take longer. But if it does happen earlier, we’ll be there. If it ends up taking all the way to next March or next June, we’re in [convertible securities] structures where we can be patient and we can wait. Ultimately, there’s a lot of upside to be had as those markets start to re-open.”

Conviction in Covid re-opening has led the team to reduce US exposure in Calamos’ two global funds—Calamos Global Equity Fund (CIGEX) and Calamos Global Opportunities Fund (CGCIX)—in favor of overseas opportunities.

Within Calamos International Growth Fund (CIGIX), there’s also been a shift toward Asia and Latin America, “focused on more reasonably valued stocks where we’re starting to see an inflection in growth flowing through to earnings.”

And, Niziolek elaborated on the appeal of small to mid-cap companies. “A lot of the global larger market cap companies managed Covid quite well because they had the ability to move resources and take advantage of different markets doing better at different times in the cycles. But,” he continued, “a lot of the regional players lagged to an extent because they were focused on one market. As we begin to see the pickup there, there’s more leverage to the pickup.”

Investment professionals, for more information on CNWIX or our Global/International funds, reach out to your Calamos Investment Consultant at 888-571-2567 or caminfo@calamos.com.

Before investing carefully consider the fund’s investment objectives, risks, charges and expenses. Please see the prospectus and summary prospectus containing this and other information which can be obtained by calling 1-800-582-6959. Read it carefully before investing.

Opinions are subject to change due to changes in the market, economic conditions or changes in the legal and/or regulatory environment and may not necessarily come to pass. This information is provided for informational purposes only and should not be considered tax, legal, or investment advice. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations.

Important Risk Information. An investment in the Fund(s) is subject to risks, and you could lose money on your investment in the Fund(s). There can be no assurance that the Fund(s) will achieve its investment objective. Your investment in the Fund(s) is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. The risks associated with an investment in the Fund(s) can increase during times of significant market volatility. The Fund(s) also has specific principal risks, which are described below. More detailed information regarding these risks can be found in the Fund's prospectus.

The principal risks of investing in the Calamos Evolving World Growth Fund include: equity securities risk consisting of market prices declining in general, growth stock risk consisting of potential increased volatility due to securities trading at higher multiples, foreign securities risk, emerging markets risk, convertible securities risk consisting of the potential for a decline in value during periods of rising interest rates and the risk of the borrower to miss payments, and portfolio selection risk. As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.

The principal risks of investing in the Calamos International Growth Fund include: equity securities risk consisting of market prices declining in general, growth stock risk consisting of potential increased volatility due to securities trading at higher multiples, foreign securities risk, emerging markets risk, small and mid-sized company risk and portfolio selection risk. As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.

The principal risks of investing in the Calamos Global Equity Fund include: equity securities risk consisting of market prices declining in general, growth stock risk consisting of potential increased volatility due to securities trading at higher multiples, value stock risk, foreign securities risk, forward foreign currency contract risk, emerging markets risk, small and mid-sized company risk and portfolio selection risk. As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.

The principal risks of investing in the Calamos Global Opportunities Fund include: convertible securities risk consisting of the potential for a decline in value during periods of rising interest rates and the risk of the borrower to miss payments, synthetic convertible instruments risk consisting of fluctuations inconsistent with a convertible security and the risk of components expiring worthless, foreign securities risk, emerging markets risk, equity securities risk, growth stock risk, interest rate risk, credit risk, high yield risk, forward foreign currency contract risk, portfolio selection risk, and liquidity risk. As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.

The Calamos Global Opportunities Fund was formerly named the Calamos Global Growth and Income Fund. This name change was effective April 1, 2021.

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