RUSSIA’S unprovoked invasion of Ukraine means global central banks won’t be as aggressive raising interest rates as they would have been otherwise, especially in Europe.
And while bourses have sold off, particularly in Europe, typically equity markets recover within a year, says Pendal’s head of global equities Ashley Pittard.
“On average, markets fall between 4 and 15 per cent in the near term after an attack,” says Pittard.
“When it looks like someone is getting control, usually a year after that equity markets are higher.”
The war in Ukraine is first and foremost a humanitarian crisis, Pittard says, and the flood of refugees out of Ukraine is tragic.
In economic terms, the immediate impact has been on commodities and share markets.
Led by oil, commodity prices are sharply higher. The cost of a barrel of Brent crude headed towards $US140 this week, the highest since 2008. The jump in commodity prices is likely to trigger higher inflation for longer, Pittard says.
Wars tend to be inflationary, he says.
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“It may mean inflation in the United States is in the 5 to 7 per cent range for longer than most people expected.
“So, the Federal Reserve will have to raise rates but maybe it will do it a bit slower because it won’t want to be too aggressive when there’s a war on.”
“It means there could ultimately be more interest rate hikes, though they may be delayed,” Pittard says.
“And there’s the risk of stagflation, rather than nice growth and moderate inflation.”
Share market volatility has increased, particularly in the Euro region.
In the first full week of trading after the invasion of Ukraine, European bourses ended down around 10 per cent, whereas the US, Japan and Chinas were down two per cent at most.
The local S&P/ASX200 was one of the few developed economy bourses that ended the week high.
European markets are now down 20 per cent off their peaks of last year, whereas Wall Street is off around 10 per cent.
“In Europe it doesn’t matter if you are a beverage company or a financial. Everything’s being sold because the region’s economies are so intertwined with Russia,” Pittard says.
“And much of that reflects the critical energy supplies that run between Russia and Europe.
“The US is less reliant on Russia so the volatility hasn’t been as great.”
During these tragic times, Pendal’s sympathy lies with the people of Ukraine in their struggle to maintain their freedom.
As responsible investors, Pendal Group and its affiliates J O Hambro Capital Management, TSW and Regnan have taken decisive steps to reduce our already minimal exposure to Russian securities.
We are limiting direct risk in client portfolios and taking decisive steps to comply with evolving sanctions and restrictions. We will refrain from investing in Russian and Belarusian securities for the foreseeable future.
The situation is evolving rapidly and we continue to monitor the emerging risks, which may take an unexpected form as the consequences ripple through the financial and economic systems.
As active managers, our purpose is to navigate our clients through a world in flux to protect their interests during uncertain times.
Ashley Pittard leads Pendal’s Global Equities investment boutique. He is responsible for setting the strategy, processes and risk management for the boutique and its funds including Pendal Concentrated Global Share (COGS) Fund.
Ashley has more than 24 years of finance experience, including roles in petroleum economics, global energy investment analysis and 20 years as a global equities fund manager.
Pendal COGS Fund is an actively managed, concentrated portfolio of global shares diversified across a broad range of global sharemarkets.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
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