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Geopolitical disruption

  • In the blink of an eye, the Russia-Ukraine geopolitical crisis has upstaged what was a resilient growth backdrop, prompting greater investor caution and risk aversion. Historically, however, geopolitical conflicts have rarely had a prolonged market impact. 
  • The most significant spillover from the conflict will be on higher energy and food prices. Inflation, already alarmingly high, will rise to even loftier levels. In the U.S., double digit inflation is not impossible. Most central banks that have been excruciatingly patient in the face of rising price pressures (read: Federal Reserve) now need to respond appropriately. Expect the remainder of 2022 to be characterized by equity volatility and bond market turbulence.

Post lift-off investing

  • For more than a decade, investors, consumers, and businesses have benefited from significant monetary tailwinds. Policy rates have been kept low by historical standards and even when the Fed did raise rates, it did so in a slow and steady fashion. These financial conditions have greatly supported equity and fixed income valuations across cycles.
  • However, with the Fed now embarking on a steep monetary tightening cycle that could see policy rates above 2%  by end-2022, investors can no longer rely on easy financial conditions to support portfolio growth.
  • Investors should brace for more volatility, adopt a more analytical approach, and be sufficiently nimble to take advantage of opportunities as they arise.

Investing: Back to basics

  • The investing environment ahead is more uncertain then ever. When the outlook could be impacted by unpredictable geopolitical factors and growth scares become more frequent, it is all the more important to maintain diversified portfolios.

Sizeable energy disruption:

  • An escalation in the geopolitical conflict that results in a sustained cut-off in Russian energy supply would not only push global energy prices and inflation sharply higher, but it would also generate an acute stagflationary economic shock in the Euro area with spillovers to the global economy.

Fed policy mistake:

  • With the Fed so desperately behind the inflation curve, policymakers have finally recognized the urgent need to tighten policy. But, having left it so late, an aggressive hiking cycle is now required to bring inflation back to target, risking a sharp economic downturn in the process. Recession risk for 2022 is still muted given the strength of the consumer and corporate balance sheets, but risks are rising for 2023 and beyond.

 

As of 31st March 2022. These are the current views and opinions of Principal Global Asset Allocation and is not intended to be, nor should it be relied upon in any way as a forecast or guarantee of future events regarding particular investments or the markets in general 


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This document has been prepared by Principal Global Investors for informational purposes only. The contents of the document should not be construed as an advice on legal, financial or regulatory issues. No person should rely on the contents of this document without first obtaining independent advice from qualified professionals. The National Bank of Ras Al Khaimah (P.S.C), its employees and consultants expressly disclaim all liability and responsibility to any person who reads this document in respect of anything done or omitted to be done by such person in reliance, whether wholly or partially, upon the contents of this document and shall not be responsible for the results of any actions taken on the basis of information provided in this document or for any error in or omission in this document.