EMR March 2022

Dear Reader

Russia’s aggression in Ukraine forces us to make the following assessment. It is highly intricate and difficult to foresee any short-to-medium term outcome of the Russian invasion of the Ukraine. At this juncture we are not in the position to foresee the appropriate steps that could convince the aggressor to stop the massacre of innocent people.

At this juncture, the major question mark refers to the efficiency of the envisaged sanctions. Will they convince the aggressor that the gains from their current policy will be significantly more negative on the Russian economy than on the free world? Power politics and naked violence dominate the discussion, making comparisons to similar periods in the past highly difficult. Here are our contextual assumptions:

Higher and sustained financial markets’ volatility

What we as economists can deduce with some accuracy is that in the short-run, volatility and fear will dominate market activity. There seems to be no doubt at all that short-term inflation will continue to rise in line with rising energy costs as international supply shrinks. In the current environment, it also mandatory to keep in mind that prices of industrial goods are largely determined not only by the availability and prices of various intermediate goods, but also, and more importantly, by other supply constraints. Particular attention must also be paid – at least in the short term – to the “longevity” of wartime activities and the corresponding countermeasures in the areas of air traffic, shipping and port congestion. Undoubtedly, these events will continue to influence price developments not only on the stock market.

Economic risks

Prior to the Russian attacks on Ukraine, it could be assumed that as the COVID-19 pandemic subsided, the global economy could and would move toward more normal standards. This catch-up effect must be postponed depending on both Russia’s feared continued belligerence and the corresponding sanctions taken and contemplated by the industrialized countries. At least in the short term, they argue for lower-than-expected economic activity.

Inflation, interest rates and currencies

Fact is that Russia’s wartime activities in Ukraine may continue to cause material shortages and thus logistical difficulties, which are likely to be far more inflationary than the recent loose monetary policy of the industrialized countries. In our assessment, there is no doubt that the impact on energy prices is likely to continue, at least in the near future. It is well known that “sanctions” do not only affect exporters. Higher prices and/or restricted import volumes have and will also suffer. In other words: Imports imply – ceteris paribus – higher real GDP growth. In this context, we are less optimistic than the vast majority of analysts. Why is this, you may ask? A simple statistic, i.e., lower imports, argues for higher GDP growth. This analytical derivation is only ceteris paribus correct. It does not take into account, for example, the respective particular impact on business fixed investment, which is also likely to be negatively affected. It is clear that consumer prices will remain high or even continue to rise, at least in the short term. It should be noted that the resulting higher inflation expectations will dampen consumers‘ positive expectations, while business fixed investment may continue to suffer from supply constraints. Such an environment is generally considered a forecast impasse. In our view, economic activity could be lower than generally expected in the coming quarters, while economic growth could pick up in the second half of 2022 and beyond, provided the invasion of Ukraine is halted. In such an environment, we expect that central banks may be forced to postpone an interest rate hike so as not to hamper the medium-term economic recovery. It should be recalled that interest rate and inflation levels vary widely across countries. At this stage, they represent a deterministic “diversification risk.” The impact on currencies will need to be closely monitored in the short to medium term. The real question will be: Which country offers the best real return on investment?

The Russian invasion of Ukraine has caused great uncertainty on the capital markets, particularly with regard to the scarcity of resources. The different marketplaces have also reacted differently, as the graphic shows. As in other times of crisis, many are switching to gold stocks.

Our contextual suggestion for investors

Even if further market corrections are to be feared in the short to medium term, we advise against panic selling. We assume that the “warmongers” will come to their senses sooner rather than later. The economic and thus also the political losses on their side usually lead to a rethinking that does not seem possible at certain times.

Given the short-to-medium-term assessment difficulties, let us ask ourselves: what will the implications for investors be? If history can be taken as a valid indicator, we would deduce that there are two specific developments shaping a rewarding investment policy over the shorter- as well as the longer-term. Banking on a certain, but slow and erratic rate of growth for 2022, by somewhat higher interest rates, inflation would be expected – in the second half of 2022 – to return down to “more normal lower levels” than those registered so far in 2022 in the USA (7.4% in January and 7.8% in February). Similar, but somehow lower developments have been registered for European indices, while the Swiss inflation remained significantly lower, i.e., 1.6% in January 2022. Assuming a modest economic recovery, we bank, even if it is highly difficult to be certain and precise, on a price reduction of crude oil (which, as measured by the NYMEX crude oil quotation has reached the highs of 2014) and also of overall transportation costs.

According to our rather positive assessment of the effects of the implemented financial market interventions ¬– to the detriment of the aggressor, the investment environment is likely to remain difficult, but not completely catastrophic. Accordingly, we expect that

  1. Equities to continue to outperform bonds and money markets. Nevertheless, on a country-by-country basis, we expect relatively high volatility on a daily and weekly basis. Why so? This ought primarily to be due to sectoral rotation, depending on short-term inflation expectations and political commentaries on interest rate changes, i.e., possible increases.
  2. Country-wise we remain focused on our home market Switzerland, the USA and selected European markets, which focus must be set on sectoral rotation.
  3. The initial situation, which is likely to be volatile, remains tied to politically complicated global politics. At this stage, we find it difficult to limit the conflict only to Ukraine. In this context, we are positively surprised by the historic decision of the Swiss government to freeze the assets of oligarchs.



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