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LGT Beacon: Tactical asset allocation for Q2/2022

March 28, 2022

The war in Ukraine adds another supply-side shock and increases economic uncertainty at a time when macro policy is constrained by high inflation and strained public finances. Despite this, most stock markets are trading higher today than at the start of the invasion. We decided to use the higher prices to de-risk our portfolios, primarily by trimming our exposure to Europe, which is most exposed to the immediate impact of the war in Ukraine.

Last week, our investment team concluded the quarterly tactical asset allocation review for Q2/2022. In this report, we provide a brief summary of our views and positioning decisions.

While the continuation of a reflationary economic expansion remains our base case longer term, the invasion of Ukraine late last month and the subsequent international sanctions against Russia and Belarus have weakened the more immediate macro outlook. Russia and Ukraine, and to a lesser extent Belarus, are important global suppliers of key commodities, including food, while the Black Sea is a major maritime trade route for the bulk of these resources. The main impact on the global economy will thus come through inflation.

The war in Ukraine and the related sanctions against Russia disrupt local production as well as transportation, which impacts prices of related goods and services worldwide not only in energy and food, but also to some extent for the electronics, automotive and other industries.  As a result, the global economy is now tilted towards stagflation, although the exact mix of inflation and real output as components of overall economic activity will vary from one economy to another. Moreover, this new supply shock comes at a time when consensus forecasts for real output growth rates had already been gradually sliding lower due to the anticipated hawkish bias during the coming monetary tightening. That downward path of forecasts has accelerated with the invasion of Ukraine and is now significant for some economies.

Similarly, with inflation rates showing no signs of abating from record high levels even before the escalation of the conflict, consensus inflation forecasts have surged in tandem. Unsurprisingly, economies that are most reliant on direct Russian energy supplies, such as Germany and Italy, will be hit hardest, at least in 2022.

To read the full report, click on the link: LGT Beacon

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Note: The next edition of the LGT Beacon is scheduled for April 2022.