More inflation, higher government debt, an even deeper drop in real interest rates – the geopolitical turmoil is having an impact on investors.
When Russian troops invaded Ukraine, the world changed, and not just politically. In view of the sanctions imposed, the economic consequences of the conflict should not be underestimated.
Many of you already know ours investment strategy world view. For investors who want to build up wealth over the long term, we have summarized what we consider to be the really relevant economic developments here. High levels of national debt and what is likely to remain low growth in the global economy are just as much a part of this as persistently low interest rates and inflation, which has been rising significantly for some time.
In such an environment, the real preservation of the value of the assets is anything but profane; we believe it needs a robust portfolio of strong, resilient companies. It is now clear that the current developments are accelerating trends that we are assuming here.
On the one hand, the war is likely to further increase government debt in many countries. On the other hand, the war acts as an accelerator for inflation, which is likely to affect different regions differently. While Europe is preparing for higher energy prices in particular, rising wheat prices are likely to become a problem in many emerging countries. The price of bread is a very sensitive topic, especially in the Arabic-dominated region, to which a good part of the wheat exported from the Ukraine has been delivered up to now. Egypt has therefore announced that it will freeze this price. Because if it is too high, it can endanger political stability in some countries that are already politically fragile.
Second-round effects threaten
In Europe and the US, energy prices had risen sharply even before Putin’s troops attacked, driving up inflation. With the economic sanctions associated with this war, the price pressure is likely to increase significantly again, especially in Europe. The trade unions are also aware that inflation is here to stay. Higher wage settlements and second-round effects are coming into focus. And these, in turn, ensure that the high level of inflation continues to solidify.
In the US, union power is significantly less than in Europe; Wages and salaries are usually to be agreed individually. Here, the high number of terminations by employees who then look for a new (often better paid) job shows that the bargaining power of employees and thus wage pressure is increasing. The US Federal Reserve has already announced several rate hikes to curb inflation. Interest rates are rising, at least in nominal terms. However, the difference between inflation and interest rates also remains high in the USA, and the real interest rate is correspondingly negative.