After months of increasing tensions policies between Russia e Ukraine, the situation eventually exploded. Keeping in mind that the crisis we are witnessing is first of all humanitarian, it has a huge impact on the political dynamics worldwide in the United States, the EU and Asia. Major changes have already taken place, such as the German decision to increase defense spending, or discussions about Finland’s NATO membership. Such developments will have a lasting effect on the universe of investmentsas evidenced by an analysis by UBS.
Risks across the commodities universe
A more short termthe prospect of an increase in prices energy and, perhaps, the prices of matter prime Agriculture it could carry further risks stagflazione for economies around the world. As the crisis progresses, we have already seen major changes in central bank communications. As Russia and Ukraine are major exporters of commodities, metals and wheat, risks to the global economy will spread through export-related trade and global inflation. Russia supplies 30-40% of EU gas imports and 10% of global crude oil imports. Russia and Ukraine together control more than a third of world grain exports and nearly 15% of global corn exports.
All this brings a context from War Coldwhich will lead to an increase in expenses militaryand also raises the question ofindependence energy. Even if the negotiations were to conclude quickly, the pressure on prices in the defense, energy, commodities and wheat sectors will be felt for a very long time. Even after the initial shock of the outbreak of the conflict, major imbalances between supply and demand are likely to persist.
Europe is more exposed to downside risks
If before the war it was expected that the ECB alzasse i taxi Of interest significantly over the next two years, it will now have to revise its agenda to adapt to geopolitical and macroeconomic developments. As for inflation, rising pressures on energy, grain and metal prices could push Eurozone inflation to between 0.3% and 1.5%. The inflation rate is expected to remain above 5% year-on-year in the coming quarters, with effects that will last until 2023.
In terms of growth there are more risks al discount which could mitigate the effect of the expected rebound in the second quarter. Trade constraints will impact both Russia and Europe. Europe is more dependent in terms of both imports and exports, and even if the macroeconomic impact of sanctions were to remain contained, companies doing business in Russia will be severely affected by the sanctions.
Two scenarios: “limited impact” and “long-term tail risks”
In a “short term and limited impact” scenario, the crisis Ukraine it would cause a 0.3-0.5% decline in Eurozone growth, without however derailing the economic cycle. Annual growth would be 3.5%. If the risks remain high and the upward pressures on energy prices do not subside, we will instead enter a “tail risk” scenario, in which Germany and Italy are likely to be most affected. In this scenario, the aggregate growth of the euro area could decline by as much as 1.7% and annual growth would slow to 2%.
In this context, i governments they would react by increasing budget spending and by supporting consumers. European mechanisms of financing (e.g. SUREs and the European Stability Mechanism) and new ones would be launched to finance the additional expenditure.
Preserve growth
As for the policy monetary no major changes are expected in the medium term, except for one greater flexibility. Providing the necessary liquidity through asset purchase programs will be a priority. Furthermore, the ECB will be concerned with preserving growth, and therefore decisions on rates could be deferred. For the moment we favor the first scenario, but it all depends on the geopolitical developments and the duration of the crisis. However, the situation could still evolve into a prolongation of the armed conflict, with repercussions on the global economy.
The risk of a long-term conflict
In the past – for example in the case of Iran – the sanctions connected to system SWIFT they proved themselves Very effective. Today, this implies that the threat of a supply shock is effective. Consequently, it will be very challenging for central banks to meet the targets set for headline inflation. In the US, inflation reached 7.5% in January; for it to return to pre-pandemic levels (in January 2020 it was 2.5%) it would be necessary, among other things, for crude oil prices to remain below $ 85 per barrel for the rest of the year and that by the end of prices of agricultural products fell 20% from current levels – something that already seems almost impossible.
Although theeconomy is already suffering on the inflation front, the trajectory of growth for the moment it seems stable. The Fed will need to remain flexible to balance growth and inflation, and watch over future risks.
Implications for Fixed Income Investors
From the point of view of the marketthe opportunities to find returns positive inflation-adjusted remain limited, barring sharp falls in inflation. Fixed income investors need alternatives. Inflation-protected securities are a guarantee against any failure of the FED or ECB to contain inflation. Should the latter remain high, investors should look to alternative strategies such as hedge funds to protect themselves from rising rates and widening spreads.
Implications for equity investors
In this context, it is essential to stay selective and focus on useful high quality with good visibility. Asymmetric exposures via hedge funds and options strategies should also help mitigate risk.