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Neuberger Berman: Russia/Ukraine situation represents ‘important risk to markets’

As the worrying news from Russia and Ukraine continues to flow, Erik Knutzen, CIO multi-asset, Neuberger Berman shares his comments regarding the ongoing situation.

“The Russia-Ukraine situation represents an important risk to markets at the moment; however, we believe that inflation and central bank policy responses to rising prices remain the most significant risk facing investors at the moment.  This is because the global economy is faced with the challenge of a unique combination of factors driving inflation in the post-COVID environment including supply-side elements such as logistics and supply chain dislocations to labor market challenges as well as demand-side forces resulting from pent-up consumer demand and the increased liquidity in the system from unprecedented monetary and fiscal stimulus in response to the pandemic.  In this environment, traditional central bank tools may not be entirely fit for purpose – hiking short-term rates will not increase the number of lorry drivers or the speed at which ships can be unloaded at bottlenecked ports.  The potential for inflation to remain structurally higher in this cycle than last appears high given structural changes in the global economy including peak globalization, new labor force dynamics, and the effort to de-carbonize the global economy.  At the same time, the risk of central bank policy error – either raising rates too aggressively or falling “behind the curve” – are elevated.”

While the Russia-Ukraine crisis clearly generates considerable risks in its own right, it also adds an unwelcome geopolitical layer to the challenge of high inflation. We have already seen Germany suspend certification of Nord Stream 2, which will likely add to Europe’s energy price inflation. Additional sanctions have the potential to add to those pressures: for example, Russia provides 6% of the world’s aluminum, which is already in short supply, and it is also an important producer of precious metals such as palladium and platinum, which are critical for the transition to the net-zero economy. We consider commodities in general, and precious metals in particular, to be effective hedges against periods of high inflation paired with low or slowing growth—heightened geopolitical risk adds more support to these assets.

 

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