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Thursday 24 February 2022
February 2022 | Russia’s full-scale attack on Ukraine has led to broad implications for markets. Global markets had not been pricing in a war scenario and are now adjusting to this military move; it will take time for the situation to settle down. In the meantime, uncertainty and volatility will persist, and we are likely to see some excesses to the downside.
01 | This is not a time to try to buy the dip, as the market does not yet fully understand the impact of this geopolitical shock. We suggest investors keep hedges in place, stay cautious, and expect high volatility.
02 | A direct effect of the escalation in the Russia-Ukraine crisis will likely be an increase in energy prices, which will add to inflationary pressures.
03 | China is relatively insulated from the conflict, further reinforcing the role of Chinese assets as a diversifier.
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President Macron is leading in the polls, but an upset victory by Le Pen would significantly change policy in France. Markets are currently complacent in anticipation of a Macron victory, but a tightening race will command some degree of market volatility in the coming weeks, adding to a complex landscape in Europe. The prospect of a European recession is another key issue, and our tactical view is that US equities are in better shape than European ones. This has nothing to do with the French election, but with the broader macroeconomic and geopolitical situation, as Europe has been hardest hit by the conflict in Ukraine.
The US economy has proven to be exceptionally resilient in the current context. We’ve witnessed strong GDP growth in the fourth quarter, mainly stemming from inventory accumulation, with consumption running a little weaker. Overall, the inflation environment is more difficult today than it has been for the past 15-20 years. Supply constraint issues will take far longer to resolve given the conflict in Europe and due to the shortages in commodities and energy in particular. We can expect inflation to return to more reasonable levels in the next 12-18 months.
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