Stockholm (HedgeNordic) – Before Russia invaded Ukraine in late February, the world’s immediate – economic – problem was surging inflation. The extensive economic consequences of the war in Ukraine are increasing the risk of stagflation, slowing economic growth accompanied by rising inflation, according to Taner Pikdöken, portfolio manager at Atlant Fonder.
“My concern right now is that the world economy is facing a period of rising and residual inflation at the same time as we are experiencing declining growth,” says Atlant Fonder’s Taner Pikdöken (pictured). “The past month has been turbulent and volatile, with Russia’s invasion of Ukraine having a very large impact on the outside world, both humanitarian and economic,” he continues. “The consequences of the war are very difficult to assess.” Aside from the enormous human suffering, the economic consequences stemming from the sanctions imposed on Russia in response to its invasion of Ukraine and the consequences from the war itself are very extensive.
“My concern right now is that the world economy is facing a period of rising and residual inflation at the same time as we are experiencing declining growth.”
Sharply rising prices for energy, electricity and physical raw materials such as nickel and lithium are just some of these economic consequences. “This has caused significant problems for both industries and households, which are facing sharply rising prices, as can be seen in the inflation figures reported,” says Pikdöken. “If the conflict is prolonged, it is reasonable to assume that inflationary pressures will continue to increase, which will put central banks around the world in a rare tough situation.”
“Raising interest rates too aggressively could lead to the world economy tipping over into a recession.”
Central banks around the world may seek to raise interest rates to reduce inflationary pressures in a very uncertain market environment, which leads to a higher probability of a “policy mistake by central banks,” according to Pikdöken. “Raising interest rates too aggressively could lead to the world economy tipping over into a recession,” he warns. A stagflation environment characterized by both slowing economic growth and rising inflation, combined with record-high indebtedness among both companies and households, “could have a major negative impact on the pricing of financial assets,” says Pikdöken. “The support from central banks we have seen historically would probably be lacking.”
“If we were to have peace, I think there is a lot of value in both the equity and corporate bond markets, where you can find most companies that have fallen sharply this year and are still far from their old highs.”
Even so, Pikdöken and his team at Atlant Fonder look ahead with some optimism, with cautiously-optimistic signs of a peace settlement between Ukraine and Russia partly due to Russia’s military struggles. “If we were to have peace, I think there is a lot of value in both the equity and corporate bond markets, where you can find most companies that have fallen sharply this year and are still far from their old highs,” considers Pikdöken. “However, the uncertainty is unusually high and it is very difficult to have a view of when and if we will have peace,” he continues. “You should continue to have a defensive approach in your placements.”
