Equities have suffered the most in Russia (because of the painful impact likely to come from economic sanctions), followed by Ukraine, and thereafter Europe (given its dependence on Russian energy). With lower trade dependencies, equity markets in the US and across Asia have suffered relatively less. The declines in safe-haven bond yields were relatively shallow because global recession risk is still judged to be low.
What may become more concerning to investors, and a dilemma for central banks, is the risk of stagflation – as the spike in commodity prices, especially energy, will push inflation even higher and may cause significant cuts in industrial production and household spending.
But if global growth slumps then wage inflation pressures are likely to correct faster and central banks could slow the normalisation of interest rates.
If recession risks appear on the radar, global policymakers may be forced to bring back more stimulus.
Aside from the adverse impact from this huge geopolitical shock, we have turned negative on global equities because markets appear to be front-running weaker fundamentals to come.
Global liquidity will likely continue to tighten, and the market is pricing in significant US Fed rate hikes.
With high valuations, especially across Developed Markets, rising yields suggest that equity markets could de-rate further.
As sharp as corrections have been into this year, it is premature to be too bearish on global risk assets. Investors should still remain active as growth assets have favourable longer-term trends, but be extra cautious and consider taking some money off the table for now, with the aim of being better positioned to take advantage of potential rebounds.
What may ultimately prove the greatest concern and uncertainty for investors is what will Russia do next if it successfully annexes Ukraine. President Biden has stated that if a NATO member is attacked, then US troops will be committed, which would likely create a much greater conflict across Europe.