Ever since NATO’s 3rd April 2008 Bucharest Summit declaration that “NATO welcomes Ukraine’s and Georgia’s Euro-Atlantic aspirations for membership in NATO… and agreed today that these countries will become members of NATO”, tensions between Vladimir Putin and the Western world have never been the same. Russia subsequently invaded Georgia later that year in August 2008, then in 2014 after the ousting of pro-Russian Ukrainian President Viktor Yanukovych, Russia invaded and annexed the Crimean Peninsula from Ukraine.

Whilst sadly it is fast becoming the next humanitarian tragedy of the modern era, it‘s hardly surprising then that in 2022 Russia has launched a larger scale invasion on Ukraine following President Zelensky’s recent announcement for his country to obtain NATO membership as part of its National Security Strategy. There is no excuse for these atrocities, and as such much of the world have taken action to sanction Russia.

The unprecedented restrictions on the FX reserves held by the Bank of Russia have handcuffed its ability to defend the ruble, which has depreciated more than 35% against the US Dollar this year and forced it to more than double its key interest rate to 20%. Could this latest act of military aggression prove to be a gross miscalculation for Mr. Putin despite his growing hatred of NATO?

At under 2% of world GDP in 2021, the impending collapse of the Russian economy will be a relatively insignificant hit to world growth. Equity markets have thus far behaved relatively calmly (excluding Russian equities!), with the S&P 500 index returning+1.5% since the invasion began on 24th February to 3rd March. Looking at how the US equity market has performed following previous invasions this reaction is not uncharacteristic. In the six months following the last five major geopolitical invasions, the US stock market has rallied and produced positive returns with an average return of +10% over the period. This is understandable as all invasions following WWII have been relatively isolated incidents with little or no negative impact on an increasingly diversified world economy.

However, it is in the commodity markets where the Russian economy is truly a behemoth and waves are being felt. It is the world’s largest exporter of natural gas and wheat, and second largest exporter of crude oil and raw aluminium. This is why in the last week alone since the invasion began, the prices of European natural gas, wheat, and brent oil have increased +105%, +59% and +18%, respectively. Whilst the US stock market may be right thus far in avoiding a knee-jerk reaction, the threat of stagflation (high inflation and stagnating growth) is one that investors should keep an eye on.

The economy is decelerating from its unprecedented 2021 pandemic recovery speed but is still expected to expand in 2022 at twice the pace of its long-term trend growth rate. Wage and employment cost growth have also accelerated to the highest levels in the post-Global Financial Crisis era, whilst consumer price inflation is at a 40-year high. However, consumers, corporations, and banks are cash rich, and remain in a good position to withstand higher borrowing costs as the Fed prepares to increase interest rates to tame inflation. The labour force participation rate continues to rise slowly but is still notably below its pre-pandemic level, despite 2 million young workers entering the workforce during the pandemic.

Economic growth expectations for 2022 are decelerating quickly as sanctions on Russia and escalating commodity prices bite. Consumer sentiment remains resilient relative to other regions and savings should provide a meaningful buffer. Consequently, Eurozone inflation expectations are converging towards US inflation expectations as the Ukraine crisis worsens, translating into an energy crisis. French President Macron is the clear frontrunner for re-election in April.

Rising consumer price inflation has now hit the highest level since 1992, caused in part by surging energy bills. A triple whammy of rising inflation, increasing interest rates, and higher taxes are expected to hurt household disposable incomes and could cause a cost-of-living crisis, potentially pushing the British economy into stagflation.

Japan’s economic recovery still lags behind other major economies but is catching up and helped by a recently announced large fiscal stimulus package from newly elected Prime Minister Kishida. Headline consumer price inflation has accelerated to above long-term levels and is gathering momentum, but core inflation excluding food & energy prices has fallen back deeper into deflationary territory indicating that most of Japan’s inflation has been imported.

Chinese property curbs and zero covid policy have substantially constrained credit demand from the property and consumption sectors. However, the broader economic slowdown is moderating as the credit and aggregate financing cycle is bottoming and tax cuts are being implemented, a sign of policymakers’ determination to stabilise the economy and boost consumption growth. Unlike most global economies, inflation pressures are low and still retreating in China, resulting in the PBoC being the only major central bank to cut interest rates this year.

Despite a buoyant global economic recovery in 2021, the BRITS economies are still expected to grow at an even pace this year relative to their developed market counterparts where policy support has been greater and vaccination programmes have been more widely available.

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