The risks of a prolonged war for the markets
10 MAR, 2022
By Constanza Ramos
A prolonged war increases the risk of a global slowdown and recession. In this context, global equities are subject to high volatility and "while there still seems to be a strong sense of risk aversion, markets appear more open to taking some risk and reinvesting in growth stocks".
Stephane Michel, Head of Fixed Income – Multi Asset Credit, Federated Hermes
Despite markets suffering their worst start in memory, they do feel like they’re trading in an orderly, albeit volatile, manner with support and tentative buying at cheaper levels. Any positive rumours or announcement is met with enthusiasm and FOMO (Fear of Missing Out) and buy the dip have been such good performers as investment strategies through the previous crises – this week the iTraxx Crossover traded in a range of 438 to 364, an amazing volatility. Occasionally, however, we do get reminded of the prospects of military escalation, stagflation, supply chain disruption, sanctions, energy blockade etc and we move lower still. What is clear is there is little consensus or conviction on which direction we go next.
Louise Dudley, Portfolio Manager – Global Equities, Federated Hermes
With record fuel prices being recorded in the US, inflation ticked higher, heightening margin pressure for corporates in the real economy. We are experiencing extraordinary volatility in global equities compounded by wavering market sentiment and the risk of recession intensifies on spiralling commodity prices. We expect ongoing swings in the short term as geopolitical uncertainty over Russian crude persists. The potential for further supply shocks across the economy is acute. Whilst there still looks to be a large risk-off sentiment, markets appear more open to taking on some risk and reinvesting in growth stocks. With commodities feeding more persistent inflation and rate hike expectations having receded, the cyclical push from a month ago has also faded. We remain broadly balanced from a style perspective and buyers of defensive growth, and in particular US companies with a domestic focus, less exposed to global macro headwinds.
Kunjal Gala, Portfolio Manager – Emerging Markets, Federated Hermes
Our attention remains focused on the conflict between Russia and Ukraine, as well as possible reactions to the Russian aggression. Markets will closely monitor whether new sanctions will be announced and the advance of Russian forces into Ukrainian territory. In addition to the obvious humanitarian catastrophe brought by the war and the risk aversion that results from an event with highly unpredictable results, the attack on Ukraine pressures prices of commodities most associated with the region. Prices of products such as natural gas, oil, wheat, corn, fertilisers, nickel, and aluminium are skyrocketing and we expect they will remain volatile, as both the conflict itself and the sanctions imposed on Russia raise doubts about the supply of these commodities in the global economy – and, with particular importance for agriculture in Brazil, also the supply of fertilisers, as Russia is a major exporter of such items.
Higher energy, commodity and food prices will inflict maximum pain on the global economy and middle/lower income households, testing governments in democratic nations with upcoming elections. A protracted war heightens the risks of a global slowdown and recession as households’ disposable income is squeezed. While energy exporting economies in EMEA and Latin America benefit from favourable terms of trade until demand destruction sets in, energy importing economies in EM will continue to suffer. It will become almost unaffordable for most economies to continue with the ‘do nothing’ status quo if oil prices remain at an elevated level.
