The Bank of Japan (BOJ) headquarters in Tokyo, Japan. Changing interest rates and government stimulus packages are likely to play a key part in reshaping the post-pandemic economic order. Photo: Bloomberg

As the global economy recovers from Covid-19, the Russia-Ukraine conflict is banking’s ‘big black swan’ in 2022

  • Pandemic restrictions are easing in most countries, but investors looking forward to a global economic recovery are now having to prepare for a bumpy ride ahead
  • Central banks are tightening monetary policy, along with financial conditions that could lead to a downturn in the economy
Read more stories from SCMP’s Private Banking Directory 2022

As the world continues to relax pandemic measures and central banks raise their rates and tighten policies, investors would do well to consider two key features of the market – inflation rates and economic performance.

With Covid-19 starting to ease in 2021, the global economy has been able to recover to varying degrees.

“In 2022, thanks to large-scale economic stimulus measures, the progress of global economic recovery is satisfactory,” said Kirk Wong, global market and forex strategist of Everbright Securities International.

Kirk Wong, global market and forex strategist at Everbright Securities International, warns that the Russian-Ukranian conflict will continue to affect global supply chains, creating pressure on the global economy. Photo: Handout

Many central banks have started to raise interest rates or tighten their monetary policies, and this activity has begun to determine the market trend. “We have turned to investing in assets that tend to have better performance when interest rates rise. The consequence of interest rate increases is tightened capital liquidity, while the subsequent effect is higher market volatility, so our investment strategy also suggests diversifying the risk of interest rates,” said Wong.

“The strategy should be applicable for the next 12 months until the speed of rate increases starts to slow down.”

China’s pension plan seen as a US$1.5 trillion carrot by top asset managers

Wong added that the unexpected conflict between Russia and Ukraine is creating a high degree of uncertainty for the economy of related regions.


“The Russian-Ukrainian conflict cut off the supply of commodities from these two countries, so we believe that the trade performance of countries that can provide alternative supply will be driven up, which is one of our investment strategies until the end of the war,” said Wong.

The risk of the economic downturn is increasing … Stagflation may happen and plunge the economy into recession
Kirk Wong, global market and forex strategist

As Covid-19 has been brought under control to a certain extent, most nations are relaxing or removing pandemic-related restrictions.

“The gradual normalisation of the workforce and production of goods will effectively ease the tense supply chain and drive trade performance,” said Wong.

However, he noted that the Russia-Ukraine conflict is bringing a great deal of pressure to the global economy. “Since both countries are major exporters of agricultural, energy and metal products, the general rise in commodity prices is fuelling inflation further. Most central banks have begun or committed to tightening monetary policy, which may have negative effects on economic growth,” said Wong.


He also believes that investors need to pay keen attention to two areas of economic data: namely inflation rates and economic growth.

“One is whether the inflation rate (CPI) can fall from the current high level, while the other is whether economic growth (GDP) can be maintained,” said Wong.

Since May, exercise classes in Hong Kong have been allowed to take place without masks, fuelling hopes for a brighter period of economic growth ahead. Photo: Yik Yeung-man

Dominic Schnider, head of global commodities and forex at UBS Global Wealth Management’s Chief Investment Office, expects inflation to peak in the second quarter of 2022 and then slow down. But he added that inflation will remain a factor due to service side bottlenecks and energy price volatility, with inflation (CPI) to end the year at 4 to 5 per cent in the United States.

Number of affluent Hongkongers drops amid stock market slump: Citibank survey

“The risk of the economic downturn is increasing as central banks have begun to tighten monetary policy, along with financial conditions that could lead to a downturn in the economy. Stagflation may happen and plunge the economy into recession eventually if CPI or GDP growth does not change the current situation,” said Wong.


Wong pointed out that the Russian-Ukrainian development and the decisions of central banks are also factors that need attention. “The rise and fall of inflation depends on when the conflict between Russia and Ukraine will end, but it is believed that the supply of affected commodities including wheat will not be restored immediately afterwards,” said Wong.

“However, the opening up of the world may alleviate some inflationary pressures, hence capping the inflation. The overall economic development relies on the level of central banks’ tightening measures. Economic growth will decline if the policy is tightened too fast.”

Travellers at Singapore’s Jewel Changi Airport. The Monetary Authority of Singapore (MAS) has announced it expects the economy to grow “above-trend” for a second year in 2022, with the output gap turning “slightly positive” and GDP fully recovering from the pandemic. Photo: Bloomberg

For the first half of 2022, the global financial market was mainly affected by three factors, namely the pandemic, monetary policy, and the Russian-Ukrainian conflict, according to Wong.


“Looking forward to the second half of 2022, the economy will be subject to the high inflation globally and low growth scenario – stagflation risk, caused by the conflict between Russia and Ukraine, the [US] Federal Reserve’s tightening monetary policy, and the epidemic,” said Wong.

Wong described the Russian-Ukrainian conflict as “the biggest black swan” in the first half of 2022.

“Commodity prices have soared, hence the monetary policy of raising interest rates to suppress inflation is expected not to be soft,” Wong said.

War premiums on agriculture and energy prices are unlikely to disappear in the second half of 2022
Dominic Schnider, head of global commodities and forex, UBS

Schnider echoed the belief that the conflict in Europe will affect commodities in the long term.


“Structurally low inventories persist across almost all sectors. War premiums on agriculture and energy prices are unlikely to disappear in the second half of 2022. Redirecting energy or commodity trade flows is a long-term endeavour,” Schnider said.

Wong thinks the investment deployment in the second half of 2022 fits into three themes – global green investment, Asian equity, and short-duration bonds.

Global ESG assets are expected to exceed US$53 trillion by 2025, accounting for more than one-third of total global assets.

“ESG will be incorporated into investment review processes to a large extent, meaning that the element of sustainable investment will grow rapidly in the next few years, and it may have a positive effect on a company’s stock price and prospects. Data shows that stocks with the ESG concept outperformed traditional indices over the past three years,” said Wong.

Taking a macro view, the Asian sector is more attractive from inflation, economic growth and valuation perspectives. “Despite the fact that inflation has increased, the International Monetary Fund data shows that the impact on Asia is relatively small,” added Wong. “The risk of stagflation in Asia is much lower than in other regions.”

Wong suggests that investors reduce interest-rate risk by allocating to short-duration bonds.

“Adding short-duration bonds and reducing holdings of long-term bonds would more effectively reduce the impact of interest rate increases on the investment portfolio,” said Wong.

“We think the Fed tightening cycle will put pressure on growth linked assets [growth stocks] still in the short-run. Our forecasts suggest that the US dollar rally will find a peak in the third quarter,” said Schnider.

Schnider added that China’s GDP growth should recover north of 4 per cent in the second half of 2022.

In a report, Norman Villamin, chief investment officer of wealth management at Union Bancaire Privée, expected headwinds to mount in China amid an extended lockdown and limited monetary support.

“Under our baseline scenario, the government will miss its growth target in 2022, but 5 per cent could still be achieved if we see a stabilisation around 5.5 per cent year on year in the second half of 2022, led by pent-up demand,” Villamin said.•

Based in Hong Kong, Doris has spent more than three years as a journalist focused on finance and technology. She graduated from Hong Kong Baptist University with a Master’s Degree in international journalism.