Central banks will be forced to reverse their initial plans and move back into a monetary policy easing cycle (Quantitative Easing “5” in the US and more money printing in Europe & Japan) instead of tightening.
Market impact
Global earnings growth could collapse by -20% / -30% while valuation multiples will be hit due to geopolitical risk and macro uncertainty. Defensive / bond proxies stocks are expected to outperform. US Treasuries, Bund and Swiss government bond yields are likely to collapse (bull -steepening) due to deflationary expectations and a flight to quality. Peripheral spreads in Europe are likely to widen similar to credit and emerging bond spreads.
Commodities will enter into a bear market while Gold could become the best performing asset class.
Scenario 04 — A coup against Putin
There has been constant speculation for most of Putin’s 22 years in power as to what it would take to trigger his departure. Looking back at history, authoritarian leaders tend to leave according to two scenarios (beyond illness or natural death): forced out by the street or by the elite. While neither of these two groups seem to be in a position to remove Putin from power, the sanctions and isolation of Russia by the West might be the catalysts that trigger a coup against him. The New Russian leaders might then negotiate a truce or prepare an orderly retreat enabling all sanctions to be lifted.
Macro impact
Such a scenario could lead to a resumption of global trade, an easing of supply chain disruptions and a boost in consumer spending thanks to a dramatic retreat of energy prices. While services inflation will remain high (wages, rents, etc.), goods inflation will peak in Q1. Central banks are expected to hike rates but financial conditions will improve as credit conditions will be loosening again.
Market impact
This would be a very bullish scenario for equity markets due to an improvement in sentiment and upward earnings revision in some sectors. The segments of the market which have been suffering the most over the last few months (European banks but also unprofitable Tech stocks, Momentum, etc.) would most likely outperform. Russian assets will enjoy a spectacular recovery. Government bonds, the dollar and commodities would underperform.
Final words
At this stage, it is very difficult to assign precise odds to any of these scenarios although cold war II (scenario A) or negotiated deal (Scenario B) look like the most likely ones.
As always, there are the known unknowns but there also “unknown unknowns”. Based on our investment philosophy, we feel it is very important to remain true to our investment process and closely follow our investment risk parameters to optimise downside protection.
