An apology – With a horrific diet of death, destruction and catastrophe now sweeping around us, it may seem difficult to examine the economic implications of the terrible degradation we are witnessing in the independent state of Ukraine. However, these horrific events should not give any comfort to the other end of this continent, which is many miles away from most of us. This regional conflict has already had a growing impact on us, and will continue to do so, and we should not take any cold consolation that distance could lessen this danger.
So here’s my point. The outlook for the new year 2022 was actually quite promising. The world economy is showing signs of continuing recovery after the massive impact of the epidemic. Interestingly, most governments have taken dramatic and generally effective steps to try to block their path through a foggy future. Yes mistakes have been made and no doubt significant damage and evidence of corruption will come to the fore, but the effects were mostly positive. Global growth figures actually looked like they were close to pre-epidemic levels. However, forward economic data is showing signs of slowing down from the previous month’s “V” shaped bounce back. The bottom line, though, is that the level of widespread confidence from consumers, investors or companies has improved, although growing concerns about increased embedded inflation are beginning to cast a long shadow.
At the time of writing the discrepancy is still developing and there is no certainty of the result. However, I still think it’s worth guessing something, even if I’m shown very optimistic later. I will work with the idea that some resolution will be found and the end result is not very catastrophic.
The primary term for any economic development is “confidence.” Without it, there would be little or no investment from the company or country, let alone trembling and frightened investors. Any kind of armed conflict will shake confidence, and thus inevitably all eyes will turn inwards as the country and the population understandably try to take care of themselves. So we need to start rebuilding the confidence of our political leaders. Maybe I’m pleasantly surprised, but I’m a little skeptical when I look at the current array. One of the few encouraging items to explore is that further deterioration of the situation is not in anyone’s interest, so international leadership must address the situation, especially from Europe and the United States. And China could be in a position to help negotiate anyway.
Another key element for the economy will be inflation and rising commodity costs. Since the period of “passed” inflation this time last year, we can now see that some more embedded inflation has started to crawl. Much of this has been driven by natural gas prices and its astronomical growth, as well as oil prices. However, the rise in prices of soft products of wheat and other commodities as a result of poor harvests of key producers (Ukraine, Russia, Canada and USA) from the climate problem has pushed the base cost for food.
Therefore, the central bank’s move to tackle rising inflation will be to raise interest rates. Of course, around the world, most of our rates have remained critical since the banking crisis. Since the recovery began last year, we have all been pushing for higher rates by central bankers. At the same time it may be seen as a good sign of growth, but at the same time any significant increase in spending could dampen further optimism. This is going to be a narrow path and much will depend on the success of our political leadership.
So what should be our personal work from here? Gold will have “fear investments” and “real assets” but often they will already be gone and we should all keep in mind that such investments provide no return and thus the great value of long-term compounding is missing.
Equity markets will be volatile, but we should look for sectors that will be strong providers with the expected recovery and a new dawn of confidence on the horizon. When looking at areas that are often neglected in the prime days of the rise of technology, value stocks and essential ore, mineral and fuel supply companies provide key components for economic growth.
This may be the time when seemingly dull companies can be most attractive with solid companies with good balance sheets and the possibility of providing greater assurance in a nervous world with clean markets. For most of us trying to predict the future is a mug game unless you have the time and understanding to focus clearly.
I would say for many investors that often the loss is better when you want to work and thus taking a long term view that common sense can only prevail it may be a good choice. There will be some indicators that can fall dramatically and thus some fair use of ETFs for selecting cheap market indicators can provide a lucrative opportunity.
If you are most afraid I can suggest buying Scotch and go to a cave in Scotland – but not for me. I’m afraid this is going to be a scary time for some and quite frightening for others, but I still hope that there is still enough common sense that our political leaders will find a way out of this dangerous land.
In the meantime let us all do what we can for those who are now in desperate need and provide some real support and assistance for all of them in their thoughts, words and deeds.