MacroResearchBoard

Looking Beyond The War – March 14, 2022

A just-released webcast examined the outlook for global financial markets and investment strategy for the next 6-12 months in the context of the Ukrainian war. While handicapping the evolution of events in Ukraine is difficult, for now the best bet is that a negotiated settlement will occur before too much damage is done to the global economy. Importantly, the euro area economy was accelerating, due to the unwinding of COVID-related restrictions, just as the war erupted and, thus, improvements in the service sector will help offset the hit to sentiment and loss of trade with Russia/Ukraine.

For investors, key capital markets indicators show that a significant slowdown in global growth is already discounted. Once a cessation in hostilities is in sight, we would expect global equities to have meaningful upside. U.S. stocks will remain a safe-haven for equity investors in the short run, but euro area stocks and especially financials will have strong upside thereafter if a resolution to the war can be achieved.

Commodity prices could spiral even higher in the interim, but are destined to decline materially on a 6-12 month horizon. Meanwhile, we remain cyclically bearish on bonds, and anticipate a more aggressive rate-hiking cycle than is currently discounted, provided that the economic drag from the Ukrainian war proves limited and temporary. Stay tuned.