Strategists see 2022 outlook as dented, not derailed by Russian war
- Team still sees global economy on track for moderately above-trend growth for 2022
- Expects European economies to recover from energy-price shock in the second half of the year
London, 30 March 2022 — Russell Investments’ strategists still expect global markets to generate moderately above-trend growth for 2022, despite the short-term risks and longer-term issues erupting from Russia’s war in Ukraine. The team believes growth will support equities over bonds and cash amid continued market volatility due to the significant uncertainty created by the war.
“Markets had plenty to worry about before the invasion, including the onset of U.S. Federal Reserve (Fed) tightening, the impact of COVID-19 lockdowns on supply chains and inflation and the outlook for China,” said Andrew Pease, global head of investment strategy at Russell Investments. “We expected global growth to moderate from the post-lockdown surge in 2021 but remain above trend in 2022. The consequences of the invasion are lower global growth, with Europe taking the largest hit and higher inflation.”
Russell Investments’ strategists believe the war is unlikely to reduce U.S. growth by more than 0.5 percentage points, while the impact on European growth is likely to be 1.5-2 percentage points (with the impact on the UK mid-way between the U.S. and Europe). This would take 2022 gross domestic product growth (GDP) projections to 3% for the U.S., 2.5% for Europe and 3.5% for the UK.
“The eurozone economy is further from full capacity than the U.S. and faces a bigger economic hit from Russia/Ukraine,” Pease said. “We expect the European Central Bank will focus on growth risks more than inflation. Markets expect two rate hikes this year but it’s likely rates will remain unchanged or only rise once as higher energy prices slow economic growth.”
While the war in Ukraine has injected further uncertainty into the outlook, Russell Investments’ strategists believe the U.S. should be among the most resilient economies globally, given its energy independence and lower share of commodity consumption in GDP. More broadly, the team sees the business cycle as rapidly maturing, a tight labor market and the Fed on a path to more restrictive monetary policy. They also see recession risks gradually increasing from the rock bottom levels earlier in the recovery.
Regarding Russell Investments’ cycle, value and sentiment investment decision-making process at the beginning of Q2 2022, it continues to score U.S. equities as expensive, UK and emerging markets at fair value and Europe as only marginally expensive after the recent market declines. The Japanese market also scores as slightly expensive. On balance, the team still expects the cycle to be supportive for global equities and remain a headwind for government bonds.
“Sentiment for equity markets is firmly oversold but not yet at the level of panic reached in late 2018 and early 2020,” Pease said. “The cycle uncertainty means we are looking for clearer signs of market panic before recommending a risk-on stance.”
At the beginning of Q2 2022, the team’s asset-class preferences are summarised as follows:
- Small preference for non-U.S. developed equities to U.S. equities. “Provided hostilities subside, above-trend global growth should favor relatively cheaper non-U.S. markets,” Pease said.
- Neutral stance for emerging markets (EM) equities, which face headwinds from the China slowdown, high energy and food prices as well as central bank tightening across other economies to contain inflation pressures. “EM equities could recover if there is significant China stimulus early in the year, the Fed slows its pace of tightening, energy prices subside and the U.S. dollar weakens,” Pease said.
- Neutral outlook on credit markets. The high yield spread is still low by historical standards and investment grade credit spreads, which widened following the Russian invasion of Ukraine, are back to their longer-term average. “High yield spreads will be at risk if the Russia/Ukraine war escalates but could perform well if hostilities subside and the cycle outlook improves,” Pease said.
- View government bonds valuations as mixed after the recent sell-off, with the U.S. now fairly valued and Japanese, German and UK bonds still expensive. “Yields will face upward pressure from continuing inflation increases and central bank hawkishness,” Pease said. “A positive for government bonds is that markets have fully priced potential tightening by most central banks and this should limit the extent of any further sell-off.”
- Regarding real assets, the team expects both global listed infrastructure (GLI) and real-estate investment trusts (REITS) to benefit if Russia/Ukraine hostilities subside, the pandemic recovery resumes and inflation concerns continue. Regarding Commodities, which has been the best-performing asset class with energy and agricultural prices surging on the Russia/Ukraine war, the team expects some of these gains will be reversed if hostilities subside but strong global demand and supply bottlenecks should support prices. “On balance, the case for commodities exposure is still positive,” Pease said.
- Expect the U.S. dollar, which has made gains this year on Fed hawkishness and safe-haven appeal during the Russia/Ukraine war, to weaken if hostilities subside and lower inflation outcomes later in the year lead to less Fed tightening than markets currently expect. The team sees the main beneficiaries to be the euro, which has become more undervalued and the Japanese yen, which has weakened on commodity price inflation and China growth concerns.
For more information, please see the team’s 2022 Global Market Outlook – Q2 update
About Russell Investments
Russell Investments is a leading global investment solutions firm with £251.6 billion in assets under management (as of 31/12/2021) for clients in 32 countries. The firm provides a wide range of investment capabilities to institutional investors, financial intermediaries and individual investors around the world. Building on an 85-year legacy of continuous innovation to deliver exceptional value to clients, Russell Investments works every day to improve people’s financial security. Headquartered in Seattle, Russell Investments has offices in 19 cities around the world, including in London, New York, Tokyo and Shanghai.
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