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I previously posited that we were undergoing a regime change of sorts in which market liquidity could be tighter, real interest rates higher, inflation higher and more persistent, and the rotation from growth assets to their value counterparts more enduring. Little did I (or probably anyone) know that today I would be writing about war and its likely economic and market fallouts.

First and foremost, I’d be very remiss if I didn’t say that we are witnessing an unfolding tragedy of epic proportions. The extent of the human suffering that will inevitably result from Russia’s unprovoked invasion of Ukraine (indeed, that already has) is deeply saddening, to say the least. And the global impact of the crisis does not end there—far from it, in fact.

Needless to say, the fluidity and frenetic pace of the newsflow are extremely important here and create an ever-changing, highly uncertain backdrop—from developments on the conflict itself, to further sanctions and financial restrictions being imposed on Russia by the West. Acknowledging that these types of risks are very difficult to analyze, I want to highlight five things that I think investors should watch closely over the coming weeks based on my observations as of this writing:

1. Geopolitics – Best-case scenario would be if there were immediate negotiations between President Volodymyr Zelensky and President Vladimir Putin in Belarus, followed by a swift settlement and ceasefire. Unfortunately, I think this is a low-probability outcome. After all, Putin’s overriding goal is to replace the Ukrainian government. The unnerving threat of nuclear weapons and the additional troops now assembled along Ukraine’s borders signal escalation more than de-escalation.

One big question here is: Where does China stand on what’s taking place to its west? China is attempting to balance its key alliance with Russia with declaring its principle of national sovereignty. The US not only hopes it can pry China away from any allegiance to Russia, but also that the US response to the Russian invasion suggests the potentially dire consequences of China attacking Taiwan. In any case, China’s current association with Russia is a negative for investors, in my view.

2. Sanctions The West has been largely unified and galvanized by Russia’s blatant aggression, resulting in a bevy of severe economic and other sanctions against Russia, Putin personally, and the Russian oligarchs. Corporations and banks have been affected as well, limiting Russia’s access to global financial-market infrastructure and preventing its central bank from accessing its foreign currency reserves. These retaliatory measures by the West are much harsher and more decisive than those elicited by Russia’s invasions of Georgia in 2008 and Crimea in 2014. They are intended to “break the back” of Putin and his coterie and to essentially neuter the Russian economy.

So far, the sanctions have excluded any steps to curtail oil and gas exports from Russia, as Western officials naturally want to hurt Russia’s economy without causing collateral damage to US and European consumers. Here are some of the numbers to bear in mind that may have global repercussions, which could outlast the conflict itself (FIGURE 1):

  • Russia is the world’s third-largest oil producer, the source of more than 10% of global supply and almost 40% of European gas. 
  • Half of Russia’s total national budget is tied to oil and gas.
  • Russia’s total exports comprise 7% of the world market, half of which go to Europe.
  • Russia and Ukraine account for 30% of global wheat exports, most of which flow through Black Sea ports that could be involved in military conflict.
  • Russia is a major producer of metals, including aluminum, nickel, and palladium, that are used in automobiles and other global industries.


Europe Is Dependent on Russia for Oil and Gas

Data Source: Eurostat, 2020. Most recent data available.


3. Inflation – We don’t know the extent to which global supply chains will be disrupted, or whether some commodity shortages could be exacerbated by the various sanctions (and by how Russia might respond to them). However, my sense is they are unlikely to improve. Thus, I think we should assume a base case of higher inflation, at least over the next few months.

January’s US Consumer Price Index1 print was 7.5%, while the US Federal Reserve’s (Fed) preferred Personal Consumption Expenditures Price Index2 registered 6.1% annually over the past year. While recent market consensus has been that inflation will likely head lower in the second half of 2022, our global macro team estimates that the latest rises in oil and gas prices could add as much as 1.5% to global inflation and subtract around 0.75% from global growth.

4. Central banks – The heightened uncertainty will likely inject a healthy dose of caution into global central banks’ efforts to fight inflation in the months ahead. The 50 basis point3 rate hike that had been widely anticipated going into the Fed’s next meeting (in March) now appears unlikely, as does the expectation of further rate hikes coming out of every subsequent Fed meeting this year. The hawkish rhetoric we’ve been hearing from the European Central Bank is also likely to be tamped down now.

The Fed, in particular, now faces a more complicated challenge than before: how to rein in inflation without tipping the US economy into recession. Striking that delicate balance may require the Fed to adopt a less hawkish policy stance, which could be a marginal positive for capital markets. On the other hand, the Fed has to make sure inflation expectations don’t become unanchored, which would force a more aggressive course of action.

5. Fiscal policy – To some degree, the conflict may be a catalyst for more fiscal stimulus in Europe, if not elsewhere as well. Higher oil and gas prices will be hitting Western consumers at an inopportune time for some of these fragile economies that are just beginning to heal from the pandemic-induced slowdown. In the US, the crisis may even give some renewed “oomph” to President Joe Biden’s Build Back Better legislation.


Investment Implications

  • Stay the course with equities – Expect a risk premium in global equity and credit markets for elevated geopolitical uncertainty, and even more so in Europe and emerging markets (EM). However, given the repricing we’ve already seen and the likelihood of less hawkish developed market (DM) central banks, we expect global equities to still outperform global bonds over a 12-month horizon. As of this writing, the US and Japan are the equity markets I favor.
  • Inflation risks remain higher for longer – As noted, Russia is a major producer of gas, oil, wheat, and metals. Shortages and disruptions in freight could drive these commodities’ prices higher. Consider adding a commodities allocation, which historically has been the asset class most sensitive to higher inflation. Treasury Inflation Protected Securities4 may outperform US Treasuries. Rising inflation and bond yields could help support value-oriented exposures, although growth assets might fare better amid weaker global growth.
  • Consider adding some defensive assets – On a relative basis, US equities, high-quality fixed income, and gold may stand to benefit from all this geopolitical uncertainty. High-quality government bonds may regain some of their portfolio diversification role and traditional safe-haven status.
  • Focus on quality In global equity markets, I find it difficult to generalize about US vs. international stocks, value vs. growth, or EMs vs. DMs because I think geopolitical risk (always a wildcard) will be a bigger driver of markets than we’ve seen during past global conflicts. Additionally, a worsening inflation/growth trade-off does not map neatly to either value or growth assets. That being said, I believe domestically focused corporations, service companies, and profitable, quality businesses with growth potential are more likely to be insulated from the geopolitical turmoil.

The views expressed here are those of Nanette Abuhoff Jacobson and Wellington Management’s Investment Strategy Team. The purpose of this piece is for informational use only and should not be construed as investment advice. They are based on available information and are subject to change without notice. Portfolio positioning is at the discretion of the individual portfolio management teams; individual portfolio management teams and different fund sub-advisers may hold different views, and may make different investment decisions for different clients or portfolios. This material and/or its contents are current as of the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management or Hartford Funds.

Talk to your finanical professional about how you can position your portfolio for potential market volatility.


1 The Consumer Price Index (CPI) is a measure of change in consumer prices as determined by the US Bureau of Labor Statistics.

2 The Personal Consumption Expenditures (PCE) Price Index is a measure of the prices that people living in the US, or those buying on their behalf, pay for goods and services. The PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.

3 A basis point is a unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security.

4 Treasury Inflation-Protected Securities (TIPS) are Treasury bonds that are adjusted to eliminate the effects of inflation on interest and principal payments, as measured by the Consumer Price Index (CPI).

Important Risks: Investing involves risk, including the possible loss of principal. • Fixed income security risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall. • The value of inflation-protected securities (IPS) generally fluctuates with changes in real interest rates, and the market for IPS may be less developed or liquid, and more volatile, than other securities. markets. • Foreign investments may be more volatile and less liquid than US investments and are subject to the risk of currency fluctuations and adverse political, economic and regulatory developments. These risks may be greater, and include additional risks, for investments in emerging markets or if the Fund focuses in a particular geographic region or country. • Investments in commodities may be more volatile than investments in traditional securities. • Investments focused in specific sectors may be subject to increased volatility and risk of loss if adverse developments occur. • Different investment styles may go in and out of favor, which may cause an investment to underperform the broader stock market. Diversification does not ensure a profit or protect against a loss in a declining market.

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About The Authors
Nanette Abuhoff Jacobson Headshot
Managing Director and Multi-Asset Strategist at Wellington Management Company LLP and Global Investment Strategist for Hartford Funds

Nanette Abuhoff Jacobson consults with clients on strategic asset allocation issues and works with investment teams throughout Wellington to develop relevant investment solutions across asset classes.

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