俄烏衝突：五大關注焦點

1. Geopolitics — Best-case scenario would be if there were immediate negotiations between President Zelensky and President Putin in Belarus, followed by a swift settlement and ceasefire. No one can get into Putin's head of course (nor would I want to try), but unfortunately I think this is a low-probability outcome. After all, Putin's overriding goal is to replace the Ukrainian government. The unnerving threat of nuclear weapons and the additional troops now assembled along Ukraine's borders signal escalation more than de-escalation.

One big question here is: Where does China stand on what's taking place to its west? The country is attempting to balance its key alliance with Russia with declaring its principle of national sovereignty. The US not only hopes it can "pry" China away from any allegiance to Russia, but also that the US response to the Russian invasion suggests to China the potentially dire consequences of attacking Taiwan. In any case, China's current association with Russia is a negative for investors, in my view.

2. Sanctions — The West has been largely unified and galvanized by Russia's blatant aggression, resulting in a bevy of severe economic and other sanctions against Russia, Putin personally, and the Russian oligarchs. Corporations and banks have been affected as well, limiting Russia's access to global financial market infrastructure and preventing its central bank from accessing its foreign currency reserves. These retaliatory measures by the West are much harsher and more decisive than those elicited by Russia's invasions of Georgia in 2008 and Crimea in 2014. They are intended to "break the back" of Putin and his coterie and to essentially neuter the Russian economy.

So far, the sanctions have excluded any steps to curtail oil and gas exports from Russia, as Western officials naturally want to hurt Russia's economy without causing collateral damage to US and European consumers. Here are some of the numbers to bear in mind that may have global repercussions, which could be longer lasting than the conflict itself (Figure 1):

• Russia is the world's third-largest oil producer, the source of more than 10% of global supply and nearly 40% of European gas.
• Half of Russia's total national budget is tied to oil and gas.
• Russia's total exports comprise 7% of the world market, half of which go to Europe.
• Russia and Ukraine account for 30% of global wheat exports, most of which flow through Black Sea ports that could be involved in military conflict.
• Russia is a major producer of metals, including aluminum, nickel, and palladium, that are used in automobiles and other global industries.¹

Figure 1

3. Inflation — We don't know the extent to which global supply chains will be disrupted and some commodity shortages potentially exacerbated by the various sanctions (and by how Russia might respond to them). However, my sense is that they are unlikely to improve. Thus, I think we should assume a base case of higher inflation at least over the next few months.

January's US Consumer Price Index (CPI) print was 7.5%,² while the US Federal Reserve's (Fed's) preferred Personal Consumption Expenditures (PCE) Price Index registered 6.1% annually over the past year.³ While recent market consensus has been that inflation will likely head lower in the second half of 2022, our Global Macro Team estimates that the latest rises in oil and gas prices could add as much as 1.5 percentage points (ppts) to global inflation and subtract around .75 ppts from global growth.

4. Central banks — The heightened uncertainty will likely inject a healthy dose of caution into global central banks' efforts to fight inflation in the months ahead. The 50-basis point (bp) rate hike that had been widely anticipated going into the Fed's next meeting (in March) now appears unlikely, as does the expectation of further rate hikes coming out of every subsequent Fed meeting this year. The hawkish rhetoric we've been hearing from the European Central Bank (ECB) is also likely to be tamped down now.

The Fed, in particular, now faces a more complicated challenge than before: how to rein in inflation without tipping the US economy into recession. Striking that delicate balance may require the Fed to adopt a less hawkish policy stance, which could be a marginal positive for capital markets. On the other hand, the Fed has to make sure inflation expectations don't become unanchored, which would force a more aggressive course of action.

5. Fiscal policy — To some degree, the conflict may be a catalyst for more fiscal stimulus in Europe, if not elsewhere as well. Higher oil and gas prices will be hitting Western consumers at an inopportune time for some of these fragile economies that are just beginning to heal from the pandemic-induced slowdown. In the US, the crisis may even give some renewed "oomph" to President Biden's Build Back Better legislation.

Investment implications

• Stay the course with equities — Expect a risk premium in global equity and credit markets for elevated geopolitical uncertainty, and even more so in Europe and emerging markets (EMs). However, given the repricing we've already seen and the likelihood of less hawkish developed market (DM) central banks, global equities may outperform global bonds over a 12-month horizon. As of this writing, the US and Japan are my favored equity markets.
• Inflation risks remain higher for longer — As noted, Russia is a major producer of gas, oil, wheat, and metals. Shortages and disruptions in freight could drive these commodities' prices higher. Allocation to commodities, which historically has been the asset class most sensitive to higher inflation may be considered. Rising inflation and bond yields could help support value-oriented exposures, although growth assets might fare better amid weaker global growth.
• Defensive assets — On a relative basis, US equities, high-quality fixed income, and gold may stand to benefit from all this geopolitical uncertainty. High-quality government bonds may regain some of their portfolio diversification role and traditional safe-haven status.
• Focus on quality — In global equity markets, I find it difficult to generalize about US versus international stocks, value versus growth, or EMs versus DMs because I think geopolitical risk (always a wildcard) will be a bigger driver of markets than we’ve seen during past global conflicts. Additionally, a worsening inflation/growth trade-off does not map neatly to either value or growth assets. That being said, I believe domestically focused corporations, service companies, and profitable quality businesses with growth potential are likely to be better insulated from the geopolitical turmoil.

¹ Source: Eurostat, as of December 2020. 
² Source: US Bureau of Labor Statistics, January 2022. 
³ Source: US Bureau of Economic Analysis, January 2022.