What’s new in the east?
Over a week has passed and the dust is far from settling. The conflict continues to rage on Ukrainian soil – fighting continues on various fronts in the capital, Kiev, and there is no indication that Russia is ready to ease the pressure. At this stage, it is still extremely difficult to anticipate what will happen in the coming weeks. All options remain on the table: a rapid de-escalation if a ceasefire is signed, which is apparently included in forthcoming negotiations between Russia and Ukraine; an intensification of the conflict; or a protracted stalemate. Any projections on the economic impacts of this dramatic episode must therefore be treated with caution.
Yet we can draw a few conclusions. There is no doubt that global growth will be significantly curtailed and inflation boosted, in particular, as a result of the surge in commodity prices. The extent of these impacts is difficult to quantify: as an example, the National Institute of Economic and Social Research in the United Kingdom is forecasting a potential drop of one percentage point of growth in global GDP and 3% more inflation for this year. And although the hike in the oil price – which flirted with EUR 120 per barrel on Thursday – will have an impact across all geographical regions, it will be Europe that suffers most from the consequences of the conflict. The European Union is particularly dependent on energy imports from Russia: Russian oil imports represent more than 25% of EU requirements, gas imports more than 45%, and coal imports are also significant. The current situation is slowing supplies and an escalation of sanctions could see the EU having to forego all or part of its Russian imports. This would lead to an explosion in the energy bill and dampen production in numerous sectors already affected by difficulties with supplies of other raw materials, in particular, agricultural commodities and metals.
Against this backdrop, how will central bankers react? For the European Central Bank (ECB), the equation is perhaps not overly complex. As core inflation is significantly lower in the eurozone than in the US, the ECB already had greater room for manoeuvre than the US Federal Reserve (Fed). In the event of an abrupt slowdown in activity combined with surging energy prices – which would ultimately have a negative impact on household purchasing power and therefore consumption – it would have little incentive to act swiftly. With the painful memory of errors committed in 2008 and 2011 when it raised rates purely on the back of energy inflation despite modest core inflation and fragile economic activity, it would certainly postpone its timetable for monetary tightening. This logic does not apply to the Fed. The impact on the US economy will be significantly lower. There, the rise in energy prices will further exacerbate inflation that is already very high and widespread across all sectors of the economy. The Fed therefore has no choice but to continue with the rapid pace of its monetary tightening, with a first hike in rates this month and the start of a reduction in its balance sheet by the summer.
Markets could therefore find themselves in a situation where the US is confronted with drastic monetary tightening, whilst Europe experiences a lull in growth. This is not a reassuring prospect, although one that requires some qualification: there have been significant corrections in valuations on many markets since the peak of summer 2021. For example, in Europe the price/earnings ratio of the EUROSTOXX 50 is today 8% below its median of the last 15 years, whereas it was 26% above this point last summer. In other words, this new situation may already be largely discounted.
Final version of 4 March 2022
Enguerrand Artaz, Fund Manager
The information provided is the result of internal analyses based on the best publicly available sources available to us. They are carried out by the fund management team as part of its activity of managing UCIs and not a financial analysis activity within the meaning of the regulations. They do not constitute investment advice. La Financière de l’Échiquier assumes no liability for the accuracy or fulfilment of its forecasts.
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