The conflict in Ukraine is continuing to have profound and disruptive impacts on global trade and investments. Unfolding as the international economy was still recovering from the Covid-19 pandemic, the conflict is one of the key factors driving rising raw material, food and energy prices around the globe. As such, even though the conflict is localised in Ukraine – its effects are rippling out across the world.
Beginning in February 2022, the conflict affected the wider global economy almost immediately. As well as the impacts on commodity markets, logistics networks, supply chains, sectors such as tourism and foreign direct investments, there is concern over the potential long-term consequences.
For business owners and wealthy families, any developments in the global economy can have long-term implications for their ability to transfer wealth or ensure the future of their family. And when events are moving as quickly as those in Ukraine, there is potential for investment portfolios and businesses to be negatively affected.
Impacting a fragile recovery
The beginning of 2022 marked an important juncture for the global economy. Many businesses were anticipating a slow but steady return to a more ‘normal’ way of operating after years of global pandemic-related disruption. As travel restrictions and local lockdowns began to ease around the world, firms were looking ahead to less severe supply chain bottle necks and lower logistical costs.
The events of 24th February shattered that feeling of optimism and quickly sent the global economy veering off onto a more volatile path. The Russian Ruble quickly hit all-time lows and the country’s equity market was forced to close for a month. The price of oil rose to over $130 a barrel, the first time since 2008, and the price of gas hit new highs. Across the world, governments scrambled to impose sanctions on Russia and enact policies to lessen their dependence on the country’s energy exports.
Almost a year later, at the beginning of 2023, a third of the world and half of the European Union looks set to enter a recession1. As well as rising inflation rates and a potential resurgence of Covid-19 in China that could impact production, the war in Ukraine continues to exert significant pressure on economies around the globe. But why?
Many consumers across Europe and Asia had understandably not fully appreciated the importance of Ukraine and other economies in the Black Sea region to the global economy before the war started. Russia and Ukraine are both among the world’s top producers and exporters of a range of essential products – including wheat, corn, barley and sunflower seeds. As well as its status as a major producer of natural gas and crude oil, Russia is a large-scale producer of fertilizer and agricultural commodities too.
Taken together, the result is a highly globalised form of market disruption that spreads well beyond Europe. Most of the products produced in Ukraine and Russia are shipped to North Africa and the Middle East as well as Europe and China. Egypt2 , for example, imports 80% of its wheat from the two countries. The impact on global trade, supply chains and commodity markets has created a highly volatile situation that wealth managers need to watch carefully and be ready to adapt to.
Short-term disruption or long-term change?
The impacts of the conflict in Ukraine are likely to stretch on for a significant amount of time. The war and the resulting jump in energy and commodity prices is adding complexity to the task of containing inflation without suppressing the economic3 recovery from the pandemic. But shocks are also impacting a global financial system that was already under pressure. In April 2022, the UN4 warned of the prospect of a global debt crisis – with developing countries spending an average of 16% of their export to service debt as well as facing rising bond yields. In November 2022, the ECB5 highlighted that increased credit risk could weigh on bank profitability in 2023. In particular, loans to energy-intensive firms have a higher probability of default than before and banks could face higher credit risks due to exposure to more vulnerable sectors such as residential real estate markets.
The Organisation for Economic Co-operation and Development (OECD) believes that the combination of geopolitical uncertainty, higher commodity prices, sanctions and supply chain disruptions has created “elevated volatility and risk aversion”. Investors are increasingly looking for haven assets – something that is also mirrored by the rotation of value stocks and the move away from crypto assets.
A large number of investors believe that the system has changed for the long term. A survey by Investment Monitor found that 69% of investors6 believe that trade between Russia and the West will be “irreversibly changed” by the war. For many this will have serious and long-lasting implications for their portfolios. In fact, many investors have seen their wealth affected – with 41% of British investors seeing a 10-20% drop7 in their portfolios in 2022.
With much of the global economy heading into recession, the outlook could be challenging. Our analysis shows8 that there has not been a single recession since WWII with positive earnings growth – but that earnings decline tends to be smaller in periods of high inflation. It seems certain, however, that portfolios could be in for a bumpy ride. Morgan Stanley and Deutsche Bank9, for example, are both anticipating double digit drops in the stock market to impact earnings in 2023. A recent poll of European fund managers10 also found that most are anticipating an earnings decline over the next 12 months. For wealthy individuals and their families, seeking out stability is likely to be a priority.
Wealth protection in an era of volatility
The war in Ukraine cast a shadow over 2022. It threw a fragile global economy into a fresh period of volatility and has contributed to millions of people facing the prospect of recession. For high-net-worth individuals (HNWIs) and their families, this volatility is likely already impacting investment portfolios, business performance and international travel. Maintaining liquidity was a major priority for many family offices11 during the pandemic, and it may remain that way for some time yet.
A volatile and fast-changing economic climate makes seeking out stability a priority – not just for weathering the storms today but continuing to secure financial security and freedom for future generations too. With the security and choice provided by Swiss Life Global Private Wealth’s solutions, we can deliver peace of mind through sustainable wealth planning.
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