As Russia invaded Ukraine yesterday, Los Angeles-based Capital Group held a planned webinar looking at the top 10 investment themes for 2022, adjusting the program to address the immediate concerns of the 4,000 or so attendees over world events.
Whereas the 10 investment themes were more U.S.-based, Capital Group’s European economist, Robert Lind, made a snap appearance to open up a discussion of the economic and investment implications of the day’s news.
“In the course of today we’ve seen two things which I think will have a more profound effect on the world economy than the sanctions,” he said. “The first is the rise of the oil price. Oil is now $100 a barrel, and we know from previous instances of geopolitical uncertainty, most recently when Russia invaded Crimea back in 2014, that higher oil prices can have a significant drag on the world economy. But from a European perspective, the much more serious concern is what’s happened to natural gas prices. Natural gas prices are up around 20% to 30% in the course of today. And I think that reflects the concern that we’ll all see a significant disruption to Russia’s supply of natural gas to the EU.”
The countries hardest hit by that disruption will be Germany and Italy, which are big users of natural gas, he said, adding that Russia will come back with its own sanctions that would add to the disruption of natural gas to the EU.
“High oil and gas prices will cause what economists call a supply shock, a negative supply shock, which effectively raises inflation and depresses economic growth together. So you actually see the worst of all possible circumstances for policy makers. That makes it very hard for central banks to decide what to do,” Lind said. “From the perspective of the Federal Reserve and the European Central Bank, they were moving toward tightening monetary policy, I think they’re likely to proceed perhaps a little bit more cautiously than they would have done otherwise because I think they’ll want to see how things play out in financial markets and see just how bad things get from a commodity price perspective. But if you leave policy too loose for too long then you can actually add to the problem itself. It’s a very finely balanced judgement that they’re going to have to make.”
Jody Jonsson, a global equity portfolio manager, and Martin Romo, a U.S. equity portfolio manager, had their own takes on the impact, both immediate and down the line.
“I’m a little bit more concerned about a recession,” she said, adding later that she’s seeing signs that the U.S. might head into a recession later this year or early next year. “Robert talked a bit about the risk of stagflation. That is clearly a risk with oil prices going over $100, and it’s particularly a risk if that starts to work its way into consumers’ expectations. Really where inflation’s hard to cure is if it starts to affect peoples’ behavior and longer term if it starts to ratchet up the way people think about everything they do, all their economic activity. How businesses plan, for example.”
Jonsson also said that the bond market’s little rally made her think that the Federal Reserve may not move on rates the way it thought it would two weeks ago, adding that one of her forecasters had told her prior to the webinar that the odds of a 50 basis points hike went from a 35% chance yesterday morning to 5% by the afternoon.
For Romo, the day’s events did not change his opinion of where the economy is heading. “I have been increasingly concerned about real underlying economic activity and the signals with supply constraints and post-Covid demand,” he said.
Romo said he’s noticed that companies have been double ordering or triple ordering supplies to both ensure supply and ensure they’re paying a lower price today than a forecasted higher price tomorrow. “I think this just reinforces that prospect that, on the other side of the short-term (Covid) event and dynamic, you’ll see an economic disappointment. I do think stagflation is a real concern. For me it reinforces that [corporate] growth will be scarce. And companies that can deliver real fundamental growth will be unique,” he said.
But what Russia’s invasion of Ukraine has done, he continued, is highlight a major shift in global economics that has been going on for some time.