Keep Calm and Carry On
The events of recent weeks in Eastern Europe have dominated TV, radio, newspapers and online news. These events have also seen market sentiment deteriorate as investors increasingly price in the prospect of damage to the global trade environment. Meanwhile, the prospect of a greater inflationary burden than was anticipated at the beginning of the year has also led to a repricing of risk, as the supply of key energy sources has come into question, pushing the price of oil to a 7 year high.
There is no doubt, that certainly in the short-term at least, the global growth outlook has deteriorated because of the war between Russia and Ukraine. Western powers have responded swiftly with sanctions which will hurt the Russian economy. Even the historically neutral geographies such as Switzerland and Monaco have joined in this, which is unprecedented relative to previous wars.
As with many matters in life, the most important element is how you respond to challenges, uncertainties and sources of volatility. To this end, it has been noteworthy over recent days that the economic restrictions on Russia have been applied more quickly and more thoroughly than in other historic geopolitical crises. Unfortunately, it has not yet stopped the invasion of Ukraine, but it has significantly heightened the rationale for a return to peace.
Markets are priced for a medium-term disruption in certain sectors, but not priced for a broader disaster. You can see this in “safe haven” assets (such as government bonds, the Japanese Yen etc), where the flight to safety has, so far, been measured. The big issue going forward, as far as we see it, is the potential for a further rise in inflation and, in particular, key commodity prices. It is already looking as if central banks have moved too slowly to combat this issue.
The invasion of Ukraine may now make rises in interest rates less likely in the short term but also more necessary in the medium term as inflationary pressures grow. Unfortunately, events also make it likely that the post-Covid economic recovery we have been looking forward to will be weaker, especially in Europe. Raising interest rates to control inflation when economies lack resilience can lead to stagflation (high level of inflation, accompanied by a low degree of economic growth) and unhappy times for equity investors.
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