No Place To Hide – March 7, 2022

Market performance in the short run will wax and wane with events in Ukraine, but the investment climate will remain challenging for some time. A scenario in which the Russian invasion climaxes before wreaking much damage to the global economy would bring a sigh of relief to equity and credit markets. Until then, however, there are few places for investors to seek safe haven, as even bond markets are struggling due to elevated inflation and the budding interest rate-hiking cycle. Notably, government bond markets have recently barely rallied despite a significant risk-off phase, underscoring the downside of historically depressed yields.

The longer-run ramifications of the Ukraine war are unclear, but potentially momentous. It is another nail in the coffin of globalization, as the major powers look to reduce risks in their global supply chains. However, on a 6-12 month horizon, we expect the global economic recovery to endure, although at a somewhat less vigorous pace than before the war in Ukraine.

In terms of inflation, the outlook is more worrisome than at any point in several decades. As examined in a just-published report, the world is facing a much broader uptrend in inflation than merely the items included in the consumption basket. This is a symptom of overly lax policy settings for a long time, and warns that the world economy has shifted into a new inflationary era. We continue to expect a prolonged and synchronized interest-rate hiking cycle, provided the Ukrainian war does not derail the global economic expansion.


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