What You Need to Know
- Columbia Threadneedle's top asset allocator says there's a 60% chance Russia isn't leaving Ukraine anytime soon.
- There could be dire economic consequences if China gets involved in the conflict, he says.
- The firm sees inflation receding this year and doesn't expect a severe recession.
A top Columbia Threadneedle Investments leader sees a significant likelihood that Russia’s involvement in Ukraine will continue, possibly with a prolonged engagement or with military action ending and Russia establishing a new government in the country.
Josh Kutin, head of asset allocation, North America, for Columbia Threadneedle said on a conference call Wednesday that he sees a 60% chance Russia will remain involved in Ukraine and a 20% probability for the best-case scenario — de-escalation. That’s a change from earlier this year, when he saw 40% probabilities for both continuation and de-escalation.
Two other potential paths include more dire outcomes for the world, namely Russian escalation through extended military operations into other countries or in response to expanded sanctions from the West, or the conflict broadening to China, he said.
China’s potential involvement, by becoming more aggressive and providing military aid to Russia, or by using the chaotic environment to introduce its own conflict against Taiwan, would be the worst among the four potential scenarios and lead to “a global recessionary event,” Kutin said. The war in Ukraine also could touch China if the U.S. decided to impose retaliatory sanctions tied to its support of Russia, Kutin noted.
“This is really a critical dynamic,” he said. Russia accounts for only a small piece of many financial indexes, while China has a far greater impact on the world economy and is a vital part of Columbia Threadneede’s analysis, Kutin said.
(U.S. Gen. Mark Milley, head of the Joint Chiefs of Staff, recently told the BBC that the U.S. is closely watching China but doesn’t expect an imminent attack on Taiwan. China considers Taiwan a breakaway province that must rejoin the Chinese state.)
Columbia Threadneedle offered a range of potential market reactions to the different Ukraine scenarios, predicting de-escalation would have a 4% positive impact on the S&P 500 total return, and 9% and 11% positive effects, respectively, in the MSCI Europe and MSCI Asia Pacific indexes.
A continuation could have flat to slightly positive impact on the indexes’ returns, while Russian escalation would mean a significant drag on the Europe and Asia Pacific indexes and a milder negative effect for the S&P 500, the firm predicted. A broadening to China would deal a significant blow to all three indexes, apart from other factors, according to Columbia Threadneedle.
Speaking of the U.S. economy in general, William Davies, Columbia Threadneedle’s global chief investment officer, said economic and market uncertainty could ease, improving sentiment, as inflation recedes this year. He predicted inflation probably will go a little higher from here and slow toward year-end, and noted consumption is starting to come under pressure.
Interest rates will continue to rise but perhaps not as far as people have expected as inflation comes down in the back half of the year, Davies said. Interest rates in the U.S. may reach 3% by year end but it’s far less clear that they’ll hit 4% in 2023, he said, explaining that the firm would be very wary of extrapolating current rate increases to 2023 as inflation improves.