Stock markets, oil price, and inflation in U.S.: Analysts assess risks of hostilities in Ukraine

Author

Valery Moiseev

Only 6% of global investment fund managers called the possible onset of hostilities in Ukraine "a key risk with unpredictable consequences for the global economy." It only ranks fifth among February's key risks, between a likely recession and the waning coronavirus pandemic. The main concern of the managers is the risk of the abrupt increases in rates by leading financial regulators. Against this background, the share of cash in funds increased to a maximum since the beginning of 2020, and investments in stocks decreased.

This is the result of a survey that Bank of America conducts every month. The issue of the war in Ukraine was included in it for the first time. In February, 363 fund managers who control $1.1 trillion in total assets filled in the questionnaires.

What fund managers concerns are

"The geopolitical factor is one of the most difficult to predict, so the increase in relevant reports in the news stream leads to an increase in the premiums required by investors in relation to the expected return on risky assets," the report says.

International managers are afraid of abrupt increases in rates by financial regulators most of all. 41% of BofA respondents see this as a key risk for the global economy over the next 12 months.

In January, the Bank of England increased the rate, and the ECB did not rule out a similar step before the end of the year. The Fed has outlined the approximate grow ratio of the base rate this year. "Increasing the benchmark interest rate and decline in the Fed’s balance sheet will have a negative impact on global liquidity all financial markets depend on, which is why the managers put this factor at the top of the list of risk sources," BofA notes.

Under such conditions, the fund managers have sharply increased the share of cash in their portfolios. Over the month, it increased from 5% to 5.3%, the highest level since May 2020. At the same time, the managers cut down investments in stocks. Moreover, they cut down investments in stocks of American companies most actively. The number of managers with the share of such securities in the portfolio below the indicative level is 15% higher than the number of those who had this figure higher. This is 20 percentage points lower than in January and the worst result since 2017.

"The February fund managers survey is partly bearish on fears of higher rates and slower growth," the Bank of America report reads. "About 30% of investors expect a bear stock market in stocks in 2022, but 66% do not expect it."

Oil price and inflation in the U.S.

The escalation of the situation around Ukraine threatens the United States with an increase in inflation by more than 10% on an annualized basis for the first time since 1981. This is reported by the international consulting company RSM.

They believe that a possible war in Ukraine could threaten with oil prices rising to $120 per barrel. Analysts at JPMorgan Chase have also previously warned that the price of oil could reach $120 per barrel in case of an escalation.

Last week, the US Department of Labor reported a 7.5% increase in annual inflation compared to the same period in 2021. This is the largest upturn in the country over the past 40 years. In the U.S., for the eighth month in a row, inflation has exceeded the 5% mark. According to the analysts, such a rapid price escalation will lead to the fact that the Fed will increase its benchmark interest rate ahead of schedule.