An apology – with a ghastly diet of death, destruction and depravity currently raging around us, it may seem callous to examine the economic effects emanating from the terrible degradation we are witnessing in the independent state of Ukraine. However, the fact that these dreadful events are many miles away from most of us should not provide any comfort at the other end of the continent. This regional conflict has already, and will continue to have, an increasing impact on us and we should not take any cold comfort that distance may make this danger any less marked.
So here is my view. The outlook for the new year of 2022 was in fact quite promising. The global economy was showing signs of continued recovery following the massive impact of the pandemic. Impressively, most governments had taken dramatic and generally effective action to try to fumble their way through a foggy future. Yes mistakes were made and no doubt significant losses and evidence of corruption will be coming to light, but the effects were mostly positive. Figures for global growth in fact looked as though they were close to pre-pandemic levels. However, forward economic data was showing signs of slowing from the “V” shape bounce back of the previous months. The key point, though, was that broader confidence levels had improved, whether from consumers, investors or companies, although a growing concern about increased embedded inflation was starting to cast a longer shadow.
At the time of writing the conflagration is still developing and there is no certainty of outcome. However, I still think it is worth making some assumptions, even if I am later shown to have been too optimistic. I will work on the assumption that some resolution will be obtained and that the end result is not too catastrophic.
The primary word for any economic development is, “confidence.” Without this, there will be little or no investment either from companies or countries, let alone shivering and frightened investors. Any form of armed conflict will shake confidence, and thus inevitably all eyes turn inwards as countries and populations try to, understandably, look after themselves. So we need our political leaders to start to rebuild confidence. Maybe I might be pleasantly surprised, but as yet I am somewhat sceptical when I look at the current array. One of the few encouraging items to look for, though, is that it is in no one’s interest to have the situation deteriorate further, so international leadership especially from Europe and the US must tackle the situation. And China may well have the vital position of helping with the negotiations in whatever form they may take.
The other key element for the economy will be inflation and the rising costs of commodities. From a period of “passing” inflation this time last year, we can now see some more embedded inflation starting to creep in. Much of this has been driven by the price of natural gas and its astronomic rise as well as that of oil. However, the soft commodity price rises of wheat and others as a result of the poor harvests in the key producers (Ukraine, Russia, Canada and the US) from climate issues have pushed the base costs up for food.
Therefore to tackle rising inflation the action from the central banks would be to raise interest rates. Of course, around the globe, most of our rates have remained on near emergency levels since the banking crisis. As recovery started last year, so we were all pushed by the central bankers towards accepting higher rates. In one way this can be seen as a good sign as growth returns, however equally any significant rise in the cost of money could stifle further optimism. This is going to be a narrow path to tread and a lot will depend upon the success of our political leadership.
So what should be our personal actions be from here? The “fear investments” of gold and “real assets” will be there but often they will have moved already, and we should all remember that such investments don’t provide any income and thus the great value of long term compounding is missing.
The equity markets will be erratic but we should be looking at those sectors which will be the solid providers as the hoped-for recovery develops and a new dawn of confidence creeps over the horizon. Time to look at those often ignored areas in the heady days of technology booms, the value stocks providing the vital elements for economic growth and the commodity companies providing the vital ores, minerals and fuels.
This may be the time when the seemingly dull can be most attractive with solid companies with better balance sheets and clearer markets likely to provide greater certainty in a nervous world. For most of us trying to guess the future is a mug’s game unless you have the time and understanding to really focus clearly.
I would say for many investors that often the damage may well have been done by the time you want to act, and thus taking a longer-term view that common sense may just prevail could be a better choice. There will be certain indices that may fall dramatically and thus some judicious use of ETF’s to pick up cheap market indices may give a profitable opportunity.
If you are most fearful then I can suggest the purchase of a case of scotch and a move to a cave in Scotland – but not for me. I am afraid it is going to be a frightening time for some and quite appalling for others, but I still hope that there is still enough common sense that our political leaders will find a pathway through this dangerous land.
In the meantime let us all do what we can for those who are now in a desperate plight and provide in thought, word and deed some tangible support and succour for them all.
