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Increased stagflation risk following Russia’s invasion of Ukraine: Market Commentary March 2022

Market Context: Increased stagflation risk following Russia’s invasion of Ukraine

Global Macro:  

  • Soaring energy prices: The Russia-Ukraine war has disrupted Russian oil and natural gas exports, triggering a surge in energy prices, which will reduce the growth potential in Europe. Oil prices have increased over 50% YTD and are now above US$100/bbl.
  • Fed funds rate up 25bps amid sustained inflation: Fueled by commodity prices, headline inflation in the US remains above 7%. Consequently, the US central bank has raised the Fed funds rate by 25bps, lifting the target range from [0%; 0.25%] to [0.25%; 0.50%]. At least 6 rate hikes in the US are anticipated by the market, which would bring the US Fed funds rate close to 2% within the next 12 months (cf. the graph below showing the Fed’s long-term rate projection).
  • Better growth prospects for 2022 in the US and Asia than in Europe: Although the war in Ukraine and its impact on commodity prices will negatively affect economic growth around the world, the US and Asia will be less impacted than Europe. There is little visibility regarding growth prospects in Europe until a ceasefire is reached.
  • China’s economic strength and stability: At the National People’s Congress in March, the Chinese government pledged to support the economy in order to reach the announced 5.5% growth target for 2022. The People’s Bank of China (PBoC) is providing an accommodative monetary policy and is ready to lower financing rates if necessary.

Financial Markets:  

  • Fixed Income: Following the Fed’s rate hike, the US yield curve has flattened, making short-term bonds more attractive relative to long-dated bonds. Unlike US and European bonds, Chinese bonds have benefited from China’s interest rate cuts.
  • Equity: Global equity markets fell around 6-9% in the first two months of 2022. However, the backdrop for equities remains positive in the US and China given strong economic growth and central banks’ still accommodative monetary policies. Expectations of higher rates and inflation have triggered sector rotations and favored financial and energy sectors, which outperformed sectors with high price-to-earnings ratios such as the tech sector.
  • Currencies: EURUSD is likely to depreciate further towards parity until a ceasefire is agreed by Putin. When that happens, we expect to see a rebound as EURUSD short positions are cut (short covering) and USD progressively moves away from its safe-haven status back to its secular downward trend reflecting the US’ massive trade and budget deficit. USDRMB is likely to continue its downward trajectory as the RMB benefits from China’s massive positive trade balance and remote position from the war.

Equity: Month to date, the S&P 500 and Nikkei 225 have rebounded 2.4% and 4.4%, respectively, while the HSCEI fell 4.8% and the Euro Stoxx 50 further lost 1.3%, largely affected by the war in Ukraine. Fixed Income: The 10-year US yield jumped 54bps to 2.37% amid market anticipations of rising rates, which has contributed to the continued sell-off in Emerging Market government bonds (-3.4% in USD; -2.2% in local currencies) and High-yield corporate bonds (-1.9% in USD; -2.2% in EUR). Currencies: With respect to USD: EUR -2.0%, AUD +2.8%; CNY -1.0%; safe-haven JPY -4.9%, CHF -1.8%. Commodities: Gold prices have edged up 0.9% so far in March, while oil prices have continued to rise (+17.3%) amid growing supply fears triggered by the Russia-Ukraine war.


  • Russia-Ukraine war: A worsening of the war would affect Europe the most, while the US and Asia could suffer an economic slowdown amid surging commodity prices.
  • President Biden’s loss of power: Due to his old age, the US president’s mental and physical health is a cause for concern. A disruption of the US presidency could generate impactful instability domestically and globally.
  • Omicron variant: New waves of infections caused by the Omicron variant could weigh on the economic growth outlook.
  • Sustained inflation: Lasting inflation would induce central banks to tighten their monetary policy faster than expected, leading to higher interest rates and a compression of equity stock valuations.
  • Commodity price surge: Commodity mining and supply chain disruptions as well as the lack of new investment in energy sectors like oil over the past five years are causing supply to lag demand, leading to rising prices and contributing to higher inflation.
  • US tech bubble & corporate tax hike: Tech stocks are under pressure, given rising long-term yields, the highest valuations since the dot-com era, and high market concentration, while we expect the Biden administration to challenge tech companies’ light taxation and push through anti-trust legislation in the US.
  • US-China tensions: US-China trade frictions remain strong, with increasing tension around Taiwan and the South China Sea. In addition, the US is increasing pressure on Chinese companies listed on US stock exchanges by implementing stricter rules targeting Chinese firms, effectively leading to the delisting of Chinese stocks from US exchanges in favor of Hong Kong and Shanghai. We expect this to result in increased volatility in the coming months.


  • Safe cash deposits: Cash can be placed in safe-haven cash deposits and earn 1% net annualized in USD or 3% net annualized in RMB.
  • Hedged bond income portfolios: As the next move for interest rates is most likely on the upside, reflecting bond buying tapering from central banks, partial hedging of bond portfolios remains key to optimize risk-adjusted returns.
  • Chinese equities: The Chinese stock market has strongly underperformed Western equities in 2021 and 2022 amid US-China tensions and increased Chinese regulation on tech firms, with Chinese tech stocks plunging 60%. However, we think the downside risk from here is moderate as the Chinese government and PBoC pledged to support the economy in order to reach China’s 5.5% growth target in 2022.
  • Financials: We believe the financial sector will continue to benefit from higher yields, but also from stronger growth via a reduction in nonperforming loans and the positive impact from lower loan provisions on earnings revisions. We think stocks of well-capitalized quality banks in the US, Europe, Hong Kong, and Japan will pay above-market dividend yields following their central bank’s green light.
  • Oil & Gas: The energy sector is a major beneficiary of the global recovery, while long-term anticipated oil demand remains robust. Moreover, we are seeing increasing interest from investors towards major energy players that are implementing green energy programs to transition from fossil fuels to clean, sustainable energy production, thus making them major decarbonization contributors.
  • Nuclear energy: We believe the nuclear sector will be instrumental in the world’s decarbonization efforts. To achieve fossil fuel reduction targets, the nuclear power industry’s safety standards need to be brought to the next level, for instance by using new technology to recycle uranium. New “green” nuclear energy is the number one priority of President Macron in France, while being high on the agenda in the US and China, which will build 150 nuclear power plants in the next 15 years.