ECONOMIC INSIGHTS AN UNRAVEL OF THE RUSSIAN / UKRAINE CONFLICT
Our thoughts are with the people suffering from the crisis in Ukraine .
The war in Ukraine is analogous to Iraq ’ s invasion of Kuwait in 1990 and US military operations in Afghanistan in 2001 . The former resulted in a 20 % fall in the US S & P 500 , followed by a decisive US Federal Reserve interest rate cut and subsequent equity market rebound within a few months .
Cash rates remain historically low worldwide and central banks are primed to raise them in response to post-covid inflation outbreaks . The path of government responses in light of the invasion by Russia is less clear . This is particularly acute with supply chain bottlenecks , wages rising and some reductions in workforces , both skilled and unskilled .
With energy prices spiking and Europe ’ s reliance on Russian energy , particularly gas , will suppress European Area growth . Forecasts are for a prospective 25 % cut in economic activity in 2022 . An extension in the length and intensity of fighting will exacerbate these impacts .
With a recent flight to the safety of long government bonds , rates in recent weeks have fallen circa 0.25 %. The increasing inflation risks will mean the drop in bond rates is unlikely to be sustained , particularly in Europe .
The conundrum of the path for asset prices , especially in the near term is acute . Excluding the Russia / Ukraine crisis , strong economic growth rebounds were recorded , including in Australia , this tied with including Covid ’ s Omicron impact lessening , vaccination rates spiking and bursts of high household savings being spent .
If conflict can and we all hope will be constrained , excluding an un-thinkable nuclear escalation , in the medium term , 2 / 3 years , current asset prices , particularly Australian & quality international companies & property trusts and secure regular income streams ought prove to be worthy investments . Despite Europe ’ s relatively strong banks , European Area asset recoveries will lag other major economies . Reference is made to the numerous charts which compare previous conflicts & impacts on the S & P500 ; The Kuwait crisis US & European rebounds compared ; Capital strength measures of European banks ; Size of trade falls in Europe and Europe ’ s energy consumption by sector .
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