Russia/Ukraine from Our Strategists Perspective

Investors have faced several headwinds thus far in 2022.  Inflation has continued to advance higher, and the Federal Reserve has shifted its focus away from stimulating the economy and toward quantitative tightening and interest rate hikes.  Russia’s invasion of Ukraine has added further volatility to an already shaky market. 

It is times like this when investors need to be reminded of the value of diversification, as well as the reasons for staying invested.  It is important to remember that the economic backdrop is sound.  Financial conditions are still accommodative in an absolute sense, job and wage growth are robust, and consumer and corporate balance sheets are strong.  We believe this volatility will be temporary, and given the strong economic fundamentals, this may in fact be a great buying opportunity for some. 

In an effort to assist you in conversations with your clients, we have compiled talking points from several of our outside strategist partners.  We hope you find this information useful.  We stand ready to assist should you need additional information. 

Sincerely,

The TPFG Portfolio Management Team

Common themes:

• Most economic and market disruptions will be felt in Russia and Ukraine itself, along with close geographic neighbors. It is unlikely to lower global economic growth below trend, nor should it cause a global recession.
• U.S. market and economic exposure to the conflict is limited, mostly through higher oil and commodity prices. U.S. economic fundamentals remain strong, and market attention will likely revert back to inflation, economic growth, and central bank policy.
• Inflation will likely stay elevated for longer, though still expected to moderate in 2022. Central banks will likely continue with monetary tightening, but at a slower pace.

Key points from our strategist partners:

Blackrock

• Reduced risk of central banks sharply rising rates.
• Economic fundamentals have not changed materially.
• Rising energy prices will exacerbate headline inflation. Peak inflation will last for longer.
• Market attention should turn back to inflation, economic growth, and central bank policy.

BlackRock. 2022. Global Weekly Commentary - Insights | [online] Available at: <https://www.blackrock.com/us/individual/insights/blackrock-investment-institute/weekly-commentary> [Accessed 1 March 2022].

Invesco

• Oil and commodities facing upward pricing pressure.
• This will add to headline inflation, but peak is still expected around middle of 2022.
• The recent conflict is unlikely to cause a recession outside of Ukraine, Russia, and immediate surrounding countries.
• A 50bps rate hike is now very unlikely.

Invesco.  2022.  Assessing the impact of economic sanctions on Russia | [online] Available at:    
<https://www.invesco.com/us/en/insights/assessing-impact-economic-sanctions-russia.html> [Accessed 1 March 2022].

Fidelity

• History shows that geopolitical crises don't typically have long-term consequences for investors.
• Countries closer to Russia will likely have a harder time finding alternative sources of energy and will experience the negative impacts placed on Russia more severely. The U.S. economy would appear to be relatively insulated from the conflict.
• The biggest impact will likely be negative market sentiment on Russian stocks, bonds, and currency.
• Higher oil and gas prices could further benefit North American energy companies.

Fidelity Institutional Asset Management. “What Does the Ukraine Crisis Mean for Markets?” Fidelity Institutional, Fidelity Institutional Asset Management®, 18 Feb. 2022, https://institutional.fidelity.com/app/item/RD_9905197.html.

Capital Group | American Funds

• The imposed economic sanctions on Russia, from a European perspective, will lead to a significant disruption of Russian gas supplies to the European Union.
• Geopolitical instability will likely push gas prices higher.
• Oil prices tend to feed through quickly to consumer prices. Recent increases likely will continue to feed into consumer prices over the next few months.
• Elevated commodity prices could lead the Fed and the European Central Bank to proceed more cautiously in terms of tightening monetary policy.

Lind, Robert. “Russia-Ukraine Conflict Threatens Global Economy.” Capital Group American

Funds, www.capitalgroup.com/advisor/insights/articles/russia-ukraine-conflict-threatens-global-economy.html. Accessed 2 Mar. 2022.

J.P. Morgan

• Market volatility to continue due to energy and commodity prices.
• Consumer and business balance sheets remain strong.
• Geopolitical tensions tend to be short lived.
• Global above-trend economic growth should continue through 2022.
• Food and energy is only 12% of U.S. consumer spending, compared with 25% in the 1970s.
• Peak inflation to be extended a few months.
• Tightening monetary policy will likely continue at a slower pace.

J.P. Morgan. 2022.  Should I worry about Russia/Ukraine tensions impacting the markets? | [online] Available at:  <https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/market-updates/on-the-minds-of-investors/should-i-worry-about-russia-ukraine-tensions-impacting-markets/> [Accessed 1 March 2022].

Chart from J.P. Morgan:

• Market effect of these geopolitical events tends to be muted, averaging a 6.5% drawdown.
• Ignoring the Israel Arab war in 1973, average recovery is 16 trading days.

J.P. Morgan.  2022.  Should I worry about Russia/Ukraine tensions impacting the markets? | [online] Available at:    <https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/market-updates/on-the-minds-of-investors/should-i-worry-about-russia-ukraine-tensions-impacting-markets/> [Accessed 1 March 2022].

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Capital Group, J.P. Morgan, Fidelity, BlackRock, and Invesco are not affiliated with The Pacific Financial Group, Inc. (TPFG). The information presented is the opinion of TPFG and is believed to be accurate but has not been independently verified. TPFG makes no warranties as to the accuracy of the information or any representations made or implied. Articles cited/linked to are the express opinion of the third party author. There are no affiliations between TPFG and any third party links. All information may be changed without notice. The information should not be construed or interpreted as an offer or solicitation to purchase or sell a financial instrument or service, and should not be relied on or deemed the provision of tax, legal, accounting or investment advice.