04-Mar-22 Macro

New 12-month targets, after the Putin shock

Putin shock forces us to revise our targets and economic outlook. Broad range of uncertainties, in both directions

  • Due to the sharp increase in energy prices, inflation rates look set to rise even more than previously expected.
  • A recession in Europe is likely to be avoided however, due to massive fiscal programs, including additional military spending, as well as private sector investments in energy infrastructure.
  • In light of underlying geopolitical uncertainties, there is the potential for plenty of volatility in financial markets, but from a 12-month perspective, we remain constructive for risk assets.
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Recent unprecedented political events force us to revise our outlook

Unprecedented events in a fluid and highly uncertain environment are not conducive to forecast accuracy. In recent days, many geopolitical experts have argued that President Vladimir Putin’s invasion of Ukraine probably marks the biggest change in international politics, at least since the fall of the Berlin Wall.[1] How this ill-fated adventure will turn out remains unclear and it is certainly too early for any firm predictions of what the eventual endgame will be, for Ukraine, Putin’s regime in Russia, or the rest of the world.[2] One way or the other, what is unfolding in Kyiv, Kharkiv and Mariupol at the time of writing may shape the views of generations to come, in ways that are hard to predict. The horrors currently being inflicted on Ukraine may one day be regarded in the same way that we now think of the Warsaw Ghetto Uprising, or the slaughter in Stalingrad, with the difference that the whole world is watching in real time.[3]

But as asset managers, we also have to stick to our knitting and focus on the outcomes we can already forecast, while acknowledging that there are many uncertainties others may be better placed to assess. In the two short weeks, since we initially defined our strategic targets for global economic developments and financial markets, the world has changed. In any case, we expect a substantial part of sanctions against Russia to remain in place, perhaps even beyond our 12-month forecasting horizon, and adjustment will take time.

Due to the sharp increase in energy prices, inflation rates look set to continue to rise from the current levels. How strong this effect will be and how long it will last is still anyone’s guess at this stage, as it depends on the disruption to energy deliveries, as well as other commodities being sourced from Russia and Ukraine, as well as second and third round effects in other parts of the world. For one thing, it is far too early to say what the damage from the war itself will eventually be, including critical infrastructure such as gas pipelines, while the damage to Russia’s reputation is likely to exceed any of our usual forecasting horizons.

In other ways too, we believe the world will not go back to business as usual, whatever that might have meant so hard on the heels of a once in a century pandemic. In Western Europe, military spending will likely rise sharply (including for cyber security), as will infrastructure investments to enhance energy independence, or at least secure supplies from more friendly allies, including boosts to the delivery of liquefied natural gas (LNG) from North America.

The Putin shock looks set to mark the third large setback to globalization and global supply chains in recent years, after the trade war between the U.S. and China, as well as Covid related supply chain disruptions. All these experiences will continue to prompt companies to re-organize their activities towards more resilience, more local production, a higher stock of inventories and, hence, probably lower potential growth in years ahead.

More immediately, supply disruptions, even if only temporary, will likely result in a slump in growth, which we think will be most pronounced in Europe, while moderate in the U.S. and other regions. We believe a recession in Europe is likely to be avoided however, due to massive fiscal programs and private sector investments in energy infrastructure, as well as cyber security. Military spending should provide additional support.

The economic damage is likely to have a more lasting impact on Russia’s economy, and significantly lower Russian living standards over the medium to longer term. But while we think there could be changes within the system of a brutal, corrupt, and increasingly authoritarian regime Putin has built over the last 20 years, we would caution against counting on popular uprisings or visible palace revolts. Instead, our base case assumes that Russia’s current rulers will retain a tight, if even more oppressive, grip on the country and Russian society. However, we believe power may well shift within that system towards those with relevant expertise on how to minimize the fall-out from the Ukraine invasion. That, as much as Western sanctions and the potential of moderating influence from remaining foreign allies, including China, should eventually pave the way towards a truce of some sort, a slow easing of tensions and negotiations, leading to some of the Western sanctions being partially eased again over the next 12 months.

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Market and policy implications

Critically, our base case does not assume a significant tightening in financial conditions. This is because we would expect decisive interventions by central banks and other authorities to ease stress in the financial system if need be. The U.S. Federal Reserve (Fed) looks set to remain on its course to fight inflation expectations via increasing rates. We expect that the key interest rate will be raised several times this year in view of significantly broader inflationary pressures. However, plans for quantitative tightening might be scaled back, delayed or reversed altogether if financial conditions deteriorate or other signs of stress in the system emerge.

Even more than the Fed, we believe the European Central Bank (ECB) will be in a data-dependent mode. With plenty of economic risks to the downside, its immediate priority is likely to be fighting recession and financial stability risks, rather than inflationary pressures, especially as the later are not as broad-based as in the U.S. yet. It is also worth keeping in mind that within the Eurozone, there is plenty of variation in terms of the extent of dependence on Russian gas imports, how quickly higher energy prices feed through to consumer prices and compensatory domestic effects. In any case, we expect a cautious approach until more data becomes available, with the possibility that the ending of the ECB’s net asset purchases could be delayed. More flexibility in the use of reinvestments of maturing bonds bought under the pandemic emergency purchase programme (PEPP) and the Asset purchase programme (APP) could also be in the cards, if required. Within our 12-month forecasting horizon, we are now only expecting one rate hike as a base case, which will mark a much more tentative reversal in monetary policy than we would have expected a few weeks ago.

Given the monetary reaction functions described the changes to our rate forecasts of government bond yields are actually quite modest compared to where they were two weeks ago, and even allowing for a very wide range of potential political, military and inflation scenarios we have modelled, especially for U.S. Treasuries. Do not be fooled by this seeming stability, though: depending on how severe and lasting energy disruptions prove, real yields and inflation expectations underpinning breakeven rates vary widely and could also prove quite volatile. As soon as the risks to the economy decrease again, we believe that we are also likely to see an initial moderate rebound in nominal interest rates, while conversely, further deterioration beyond what we and markets are currently expecting could result in declines, despite inflationary pressures.  Needless to say, either pattern would have ripple effects for other asset classes. 

Asset-class implications

Fixed Income & Currencies: In the short-term, we believe government bond yields are likely to remain caught between economic risks, rising inflation pressures, continued expansive monetary policy and massively increasing government debt. On a 12-month horizon, however, we continue to expect a moderate increase in nominal yields. Our forecasts for corporate bond spreads have been revised upwards in light of recent developments, however over the next 12 months we see potential for spread tightening again. From a risk-return perspective, Asian corporate bonds appear to us to be the most attractive. We expect the U.S. dollar to remain firm amid heightened risks, with the 12-month forecast against the euro upgraded to 1.15 from 1.20.

Equities: Although we would remain cautious on equities in the short term, we believe the markets should nevertheless find a bottom over the next few months and then rise again, supported by persistently negative real yields and a rebound in the economy. Dividends, i.e., the carry in real terms that equities offer, could also prove attractive, in an environment of higher inflation, medium-term inflation uncertainties and lack of viable alternatives. Keep in mind, however, that our targets are forecast from a 12-month perspective, with an unusually wide range of potential outcomes and the potential for plenty of volatility in light of the uncertainties described above.

Alternatives: For both oil and gold prices, Russia’s invasion in the Ukraine have expanded the geopolitical risk premia embedded in prices in the near term, and it is too early to say how quickly peaks will be reached and how long they can last, before moderation sets in. In the short-term, we believe the inability and unwillingness of the world’s largest crude producers to increase supply, will continue to drive the front of the futures curve to abnormally high levels at which global demand destruction become inevitable. That in turn does not bode well for the future of crude prices. If additional sanctions on Russian imports are implemented, 60 million barrel of strategic petroleum reserve (SPR) releases will not be nearly enough to compensate for 7.8 million barrels per day of Russian exports of crude and oil products. Elevated geopolitical risk premium is also likely to cause gold to trade above fair value in the near-term. In the longer-term though, U.S. interest rate increases are likely to create some headwind to gold, which changes in real yields and the U.S. dollar adding to uncertainty.

ESG impact: We believe the crisis is likely to serve as an additional wake-up call for investors to take ESG risks seriously. Russian assets have long traded at discounts, reflecting both environmental and governance concerns. Their collapse in the last few weeks illustrates, however, how severe the impact of such risks can be, when they are finally fully priced in.

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4.1 Macro forecasts

GDP growth (in %, year-on-year)



United States 3.4 2.4
Eurozone 2.8 2.2
United Kingdom 2.8 1.5
Japan 2.5 1.4
China 4.5 4.8

Benchmark rates[4] in %


March 2023F

United States 0.00-0.25 1.50-1.75
Eurozone -0.50 -0.25
United Kingdom 0.50 1.25
Japan 0.00 0.00
China 3.70 3.50

Consumer price inflation (in %, year-on-year)



United States[6] 4.7 2.7
Eurozone 8.0 3.3
United Kingdom 7.6 4.4
Japan 1.8 1.5
China 2.8 2.8



March 2023F

Gold 1,932 2,100
Oil (WTI 12M Forward) 111 110

4.2 Asses-class forecast



March 2023F

U.S. Treasuries (2-year)



U.S. Treasuries (10-year)



U.S. Treasuries (30-year)



German Bunds (2-year)



German Bunds (10-year)



German Bunds (30-year)



UK Gilts (10-year)



Japanese government
bonds (2-year)



Japanese government
bonds (10-year)





March 2023F

Spain (10-year)[7]



Italy (10-year)[7]



U.S. investment grade[8]



U.S. high yield[8]



Euro investment grade[7]



Euro high yield[7]



Asia credit



Emerging-market credit








March 2023F

United States (S&P 500)



Europe (Stoxx Europe 600)



Eurozone (Euro Stoxx 50)



Germany (Dax)



Switzerland (SMI)



United Kingdom (FTSE 100)



Emerging Markets (MSCI Emerging Markets Index)



Asia ex Japan (MSCI AC Asia ex Japan Index)



Japan (MSCI Japan Index)





March 2023F
















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1. See, for example, https://www.nytimes.com/2022/02/27/opinion/putin-russia-ukraine-europe.html;

2. https://www.nytimes.com/2022/03/02/opinion/ukraine-putin-russia-endgame.html

3. https://www.ft.com/content/131068c8-5a5e-466a-a476-48de30d97760

4. U.S.: Federal Funds Rate, Eurozone: Deposit rate, UK: Repo rate, Japan: Overnight call rate, China: 1 year lending rate

5. Source: Bloomberg Finance L.P.; as of 3/3/22

6. core rate, personal consumption expenditure

7. Spread over German Bunds

8. Spread over U.S. Treasuries

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