• The war is a high-risk gamble on the part of Russian President Vladimir Putin as the Ukrainian government and citizens will be more determined to lean towards the West. Ukraine may regain full control of its territories only in the post-Putin era — and it is uncertain when that era will begin.

• Putin’s reassessment of the post–Cold War order is expected to continue irrespective of the Ukraine invasion’s outcome. This crisis is one step in a long game, which is our base case scenario. And there is also an upside risk for a nuclear war in Europe.

• Narratives from the Russian invasion: (1) risk of a power shift from nuclear power to nuclear tension; (2 global supply chains disruption to continue; (3) possibility of a 1973-like oil shock; (4) complications for global central banks, and; (5) cyberattacks.

• This conflict still has a strong impact on the Asean region, especially the agriculture and power segments, but the main concern is the surging inflation induced by the global energy market. Besides rising prices, the region will also feel the knock-on impact on its economic growth directly and indirectly – causing a 5%–-15% cut in their current GDP outlook, depending on the exposures and policy measures.

• On the Malaysian front, as an open economy: (1) the severity on growth will depend on whether the war ends up on a nuclear war path or not; (2) there will be upwards pressure on living costs; (3) a well-scripted tighter monetary policy could be thrown out; and (4) limited pressure on our fiscal balance.

• The bond market’s reaction so far is pointing towards the risk off stagflation. The US Treasury yield curve is seen flattening and the spread between our MGS and UST is also showing a declining trend. Underpinned by the ongoing uncertainties, nominal yields are expected to trend downwards due to a greater appetite for safe-haven assets.

• And the real yields will remain depressed owing to rising inflation expectations, portending weaker growth. On that note, the risk of stagflation is becoming far more glaring in the current scenario.

• As for equity markets, the fall was a knee-jerk reaction to the Russia-Ukraine conflict. The markets are expected to tread in choppy waters before discounting this development and stage a sharp rebound. In the past, markets tend to generally overreact to geopolitical risks.

• But as events unfold over time, there is a realisation that the situation might get diffused. The rallies in equity markets could turn much sharper. They will recover lost ground and trend higher after more clarity on the event.

• In the meantime, investment decisions must be taken based on the fundamental and economic scenario both in Malaysia and globally. The worst is yet to be fully discounted — a nuclear war. Should there be some positive clarity, a rebound is envisaged but it may not be a sharp V-shaped movement.

Source: AmInvest Research - 3 Mar 2022