Divisions & Uncertainty
Before the war broke out in Ukraine, our Investment Committee concluded that global growth would decelerate faster, and that monetary policy tightening expectations were too aggressive and seriously mispriced.
At that time, our monthly investment committee decided to reduce our fixed income underweight and reduce our equity overweight. We expected central banks to support growth and financial market stability but not be overly concerned about inflation, thus not responding aggressively to higher inflation data. Thus, we have added broad commodity exposure. With a war being waged in Eastern Europe and the higher level of uncertainty a move to a more conservative asset allocation is indeed warranted.
Geopolitical developments are likely to create headwinds to growth, and tailwinds for inflation. The global economy is already slowing; recent developments may accelerate the deceleration of global growth. We believe beyond the war, there has been a general movement in the world from unipolarity towards bipolarity. Bipolarity can be defined as a system of world order in which most of the global economic, military, and cultural influence is held between two states. The classic case of a bipolar world is that of the Cold War between the United States and the Soviet Union, which dominated the second half of the twentieth century. Bipolarity has significant implications for global order and the global economy. The key question is on the longevity of bipolarity whether the conflict is inevitable, and to what extent does bipolarity creates clear distinct power blocs. If bipolarity is the new normal, then we need to prepare for constant tension between the two power blocs.
In conclusion, we believe market pricing of monetary policy adjustments remains mispriced even after the recent retracement of some policy rate hike expectations. Major central banks will have no choice but to adjust monetary either ultra-slowly or not move at all until there is clarity on the outlook and outcome of the war in Ukraine. Additionally, we believe the global march towards bipolarity will create general upward price pressures across the commodity spectrum.
Finally, as with most geopolitical events, and especially events of conflicts and wars, we have very poor visibility on how long the war will last and how deep and broad the negative spill over may be. Thus, we will indeed monitor the news and markets extremely closely and may need to further adjust our asset allocation strategy.
See our asset class views.
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