Wars, like pandemics, can lead to changes in the global economic and financial regime. While it’s too early to tell how the Russia/Ukraine conflict will eventually affect economies and markets, a range of trends could emerge from this crisis that would have substantial investment implications. Here’s a framework for considering some of the most important potential macroeconomic and financial changes that could impact investors over the short and medium term.
Potential Macroeconomic Impacts
Short-Term Stagflationary Impulse
The escalating Russia/Ukraine conflict threatens to push prices higher in two key areas: energy and food. A mix of risk premium, supply disruptions, and compositional demand changes (e.g., Germany tripling its LNG purchases) threaten to push energy prices higher. At the same time, Ukraine and Russia are both major agricultural producers. If consumer demand gets throttled while prices move higher, the growth/inflation mix could deteriorate, leading to stagflation — most notably in Europe but also in EM energy importers.
Supply Chain Squeeze
The conflict threatens to prolong the pain of the supply chain difficulties that have plagued the global economy over the past year. On the margins, airspace closures are shutting down cargo transit routes; Ukraine has also been blacked out as an exporter of cargo/equipment. In addition, Western sanctions are likely to generate a wide range of unquantifiable side effects that could further strain supply chains. These include Russia’s role as an exporter of key precious metals used for high-end electronics and catalysers; the effect of potential Russian retaliation, including cyberattacks; and financial and trade dislocations, with Russian trade curtailed or rerouted. These small system shocks would probably have a negligible effect in ordinary circumstances, but these marginal pressures may add up to a very meaningful effect on today’s stretched supply chains.
Medium-and Long-Term Stagflationary Pressures
COVID-19 accelerated some global trends — including decarbonisation and deglobalisation of value chains — that have the potential to contribute to higher trend inflation. The Russia/Ukraine conflict may contribute an additional trend toward energy diversification. Furthermore, the conflict has added to deglobalization momentum through sanctions and geopolitics; expect re-shoring to finally gain some real traction. The potential re-armament of Western economies could pose a geopolitical headwind to capital markets as it could lead to inefficient capital allocation. Think of this as the expiration of the post-Cold War peace dividend, with increased costs of larger armies and non-productive arms stockpiles. All of these could together raise prices and curtail growth over the longer term.
Potential Financial Impacts
The exclusion of some Russian banks from SWIFT — especially the Central Bank of Russia — would lead to series of dislocations in the financial system. One set of dislocations would be the direct result of unpaid claims or transfers, and their knock-on effects. Other dislocations would be indirect — e.g., financial transactions being deterred by worries over counterparty risk. Both would require that central bankers take action to ensure adequate liquidity. The longer-term after-effects of SWIFT sanctions might include the urgent development of an alternative payments system — likely by China. Such an alternative could see USD monetary dominance challenged by liberalised capital markets in China. In fact, the RMB is already behaving like a safe haven currency (as it did during March 2020).
Normalisation of Crypto
To ensure the effectiveness of sanctions, unregulated areas of finance would likely need to be addressed systematically, meaning that any potential timelines for regulation of crypto currencies would accelerate. The “off-ramps” from crypto into fiat currencies would likely be made subject to regular anti-money-laundering and know-your-customer standards. Both supervision of the blockchain networks and approval of Stablecoin for use in settlement purposes are possible related actions.
The conflict in Ukraine and the world’s response to it have created a series of cascading shocks to economies, markets, and to the global geopolitical landscape. The human toll of this crisis is, of course, of foremost concern. As investors, we’re monitoring the situation closely and will regularly update our views on the investment implications of this crisis. For more information, please contact your State Street Global Advisors relationship manager.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without State Street Global Advisors’ express written consent.
The views expressed in this material are the views of Elliot Hentov through 28 February 2022 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.
All information is from State Street Global Advisors unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Past performance is not a guarantee of future results. Investing involves risk including the risk of loss of principal.
The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
For EMEA Distribution: The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.
SPDR ETF is the exchange traded funds ("ETF") platform of State Street Global Advisors and is comprised of funds that have been authorised by European regulatory authorities as open-ended UCITS investment companies.
SSGA SPDR ETFs Europe I and II plc issue SPDR ETFs, and is an open-ended investment company. The Company is organised as an Undertaking for Collective Investments in Transferable Securities (UCITS) under the laws of Ireland and authorised as a UCITS by the Central Bank of Ireland.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.
SSGA SPDR ETFS MAY NOT BE AVAILABLE OR SUITABLE FOR YOU. THE VIEWS EXPRESSED/INFORMATION IN THIS SITE DOES NOT CONSTITUTE INVESTMENT ADVICE, FINANCIAL, LEGAL, REGULATORY, ACCOUNTING OR TAX ADVICE. INDEPENDENT ADVICE SHOULD BE SOUGHT IN CASES OF DOUBT. NEITHER THE INFORMATION NOR ANY OPINION CONTAINED ON THIS SITE CONSTITUTES A SOLICITATION OR OFFER TO BUY OR SELL SHARES OF THE FUNDS OR ANY OTHER FINANCIAL INSTRUMENT.
Standard & Poor's®, S&P® and SPDR® are registered trademarks of Standard & Poor's Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation's financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.
SPDR ETFs may be offered and sold only in those jurisdictions where authorised, in compliance with applicable regulations.
Information related to Mexico
This information does not constitute and is not intended to constitute marketing or an offer of securities and accordingly should not be construed as such. The Funds referenced herein have not been, and will not be, registered under the Mexican Securities Market Law (Ley del Mercado de Valores) and may not be publicly offered or sold in the United Mexican States. Disclosure documentation related to any of the aforementioned Funds may not be distributed publicly in Mexico and shares of the Funds may not be traded in Mexico.
You should obtain and read a prospectus and KIID relating to the SPDR ETFs prior to investing. The prospectus/KIID describing the characteristics, costs, risks and other relevant information of SPDR ETFs are available for residents of countries where SPDR ETFs are authorised for sale on the SPDRs website or from Cecabank, S.A. Alcalá 27, 28014 Madrid (Spain) who is the Spanish Representative, Paying Agent and distributor in Spain.