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Market update – March 2022

Russia's invasion of Ukraine could result in higher global inflation – and lower growth.

01/03/2022
Market-update-March-2022

Russia and Ukraine

Though there were warnings, Russia’s invasion of Ukraine has come as a shock to both the international community and investors. Tragically, it is also turning into a humanitarian disaster, one that many charities are already starting to respond to. The market reaction has been sharp. European stock markets fell 4% on the day of the invasion and, despite a rebound the following day, remain volatile. Oil prices have risen above $100 for the first time since 2014. Investors are also growing concerned about the risk of financial contagion as the Russian banking system and companies are excluded from Western markets. Sadly, this dark chapter overshadows much better news on coronavirus, with falling cases in many countries suggesting that the pandemic is finally nearing its end.  

Higher risk of stagflation

While the Russian and Ukrainian economies are small on a global basis, recent events will have significant consequences for the global economy. Commodity prices are the key transmission mechanism. Prices for many natural resources, not just oil, have risen sharply amid concerns that there could be restrictions on Russian exports – imposed by either the West or Russia. This will mean inflation continues to move higher over the coming months. At the same time, growth could suffer as higher food and energy prices erode disposable income and consumers become more cautious. Given its dependence on Russian energy, Europe is likely to experience the greatest impact in terms of both growth and inflation. The US and Asia should prove more resilient.                                          

Will rate rises be delayed?

The invasion of Ukraine complicates central banks’ efforts to bring inflation under control – and may well change the outlook for interest rates this year. While headline inflation figures look set to rise further, declining real incomes could reduce underlying inflationary pressure. Central banks are likely to tread more cautiously as they wait to see the economic impact. Bond yields have declined slightly from recent highs as investors adjust their expectations for interest rate rises and demand for the safe haven of government bonds increases. Schroders’ economists now expect the Federal Reserve to raise interest rates four times this year, compared to five previously. We do not expect the ECB to raise rates at all this year.

Portfolio positioning

We remain comfortable with our allocation to equities, despite recent volatility. This is based on our expectation of continued US economic expansion, which is unlikely to be derailed by slower growth in Europe. Given our view that volatility was likely to be higher this year than last, we were focused on staying invested but increasing diversification, including allocations to alternative assets such as property, commodities and absolute return funds to help protect performance. Over the coming weeks, further volatility could present opportunities to add to portfolios. In general, we would look to add across asset classes rather than solely to equities. This helps ensure portfolios remain appropriately diversified and have sufficient “defensive ballast” in the event of further stock market falls.

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Benchmark Financial Planning is an Appointed Representative of Best Practice IFA Group Limited which is authorised and regulated by the Financial Conduct Authority, the registration number is 223112. Registered office: Broadlands Business Campus, Langhurst Wood Road, Horsham, West Sussex, RH12 4QP. Registered in England and Wales No 07572431.

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