Global Market Overview – February 2022
On Thursday 24 February, Russia launched a large-scale invasion of Ukraine. The situation has rapidly deteriorated. While the Western response has been quick and surprisingly strong, it is unlikely to bring about a swift military conclusion.
According to Vladimir Putin, “Ukraine has never had its own authentic statehood” and that it is part of Russia’s “history, culture, and spiritual space”. He claims that the invasion is an effort to “demilitarize and de-Nazify” Ukraine.
If the 1991 referendum is anything to go by, the majority of Ukrainians disagree with this - 84% of eligible voters went to the polls and 90% voted in favour of independence. A lot has happened since then, but it is clear that Putin wants to stop Ukraine from moving closer to the West and NATO, remove its statehood, and claim full control of it, as is the case with Belarus.
To know what happens next, one would need to get inside Putin’s head. That’s not easy, but Linda Thomas-Greenfield, the US ambassador to the UN, summarises his ultimate motivation well: “In essence, Putin wants the world to travel back in time, to a time before the United Nations, to a time when empires ruled the world. But the rest of the world has moved forward. It is not 1919, it is 2022.”
Despite representing 11% of the world’s landmass, Russia is not an economic superpower by any measure. Prior to the conflict, it was only producing 3% of global GDP and its share of global exports was only 2.5%. As Jason Furman, Obama’s economic advisor, put it: “Russia is incredibly unimportant in the global economy except for oil and gas. It’s basically a big gas station.”
Russia is a big gas station, but it’s not the only gas station. It accounts for around 12% of global oil production – enough to impact oil prices and possibly inflation figures (something we have a keen eye on), but not enough to derail the global economy.
So, will this change the outlook for global businesses? Probably not. Pharma companies will keep selling medicine, car companies will keep making cars and banks will keep lending money. Markets tend to remember this pretty quickly. Following some notable examples of geopolitical events, since the war, US equities tend to shrug off initial concerns and focus on what’s important.
Core views
Growth will be stronger than the last decade... Strong consumers, confident businesses and supportive governments mean one thing; stronger growth. The mushy, slow, volatile growth of the last decade will vanish, to be replaced with a more confident and self-sustaining growth cycle.
Inflation will be higher than the last decade… The stronger demand does mean higher inflation too. To be sure this does not mean worryingly high, but higher, nonetheless. This will have huge implications for interest rates and savers need to be ready.
March 2022
With thanks to Seven Investment Management LLP for their views and market thoughts. RiverPeak Wealth Limited