Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Ukraine war to cut growth, boost inflation
The deepening war crisis in Ukraine is showing no sign of abating any time soon, with inflation hitting historical highs as war effects compound inflation triggered by the Covid-19 pandemic.
BlackRock has released a research note covering its macro and geo-political view. The global asset manager says, “The war in Ukraine has already caused a terrible human toll. We see it extracting a heavy economic price as well, mostly via higher energy costs. This is a major supply shock layered onto an existing one, and we see it resulting in higher inflation and lower growth, especially in the euro area. This puts central banks in a bind: trying to contain inflation will be more costly, and they can’t cushion the growth shock. We prefer developed equities in this inflationary environment.”
The US Federal Reserve has raised interest rates for the first time since December 2018, by 0.25%, qnd reportedly expects to lift rates six more times this year. Despite the sentiment build-up, BlackRock believes it will be a ‘muted’ response to inflation. The war in Ukraine is what is causing concern.
Over the year, central banks will be put to the test. Trying to contain inflation may turn out to be quite a costly exercise. This is why, in this environment, BlackRock says it prefers developed-market equities.
Besides the doom and gloom, European equities bounced from 2022 lows and the price of oil continues to march higher and higher. The Ukraine war is one of the main drivers behind higher energy prices, throwing a dampener on growth and fuelling supply-driven inflation.
Europe is most exposed via natural gas prices, which have surged beyond 2021 peaks, as the red line in the chart shows, before reversing a bit last week. According to BlackRock, “The big difference with 2021: High energy prices are now the cause of a downdraft in growth, whereas they were the outcome of strong growth then. The culprit is Europe’s reliance on Russian gas in an already tight market.
“The powerful economic restart from the Covid 19 shock in 2021 had already exposed mismatches in the region’s energy supply and demand. This was aggravated by a mix of geo-political factors and weather-related supply disruptions just as European inventories were low,” says BlackRock.
What does this all mean?
Higher energy prices are never a good thing. In BlackRock’s view, Europe is facing a large, stagflationary shock. As a result, analysts are downgrading forecasts and increasing their inflation expectations. The overall message is to avoid Europe for the time being: the US is in a better spot and has a larger growth cushion, thanks to the strong restart momentum it has.
