Ukraine war two scenarios for the coming months

Against the backdrop of the Ukraine war and rising inflation, there is great uncertainty in the financial markets. Cristian Balteo and Johannes Haubrich of Nordea Asset Management use two scenarios to illustrate how investors might manage their portfolios in the coming months.

The outcome of the war in Ukraine is uncertain, which unsettles many investors. Nordea Asset Management experts Cristian Balteo, Head of Product Management – Multi Asset, and Johannes Haubrich, Head of Product Management – Fixed Income& Equity, we present two possible scenarios for the course of the war and draw conclusions for portfolio management in the coming months.

Scenario 1: The crisis region stabilizes

If there is a sustained ceasefire and stabilization in the region in the short term, the two experts forecast oil and commodity prices to remain high even in a moderate growth scenario. In such a scenario, inflation would not peak until the second half of 2023. Central banks likely to stay the course, but tighten faster than currently signaled.

"In this scenario, revenues stabilize and default rates remain low", predicts Haubrich. "Corporate bonds and equities become attractive again, with a focus on green change and inflation protection. Stocks offer some protection against rising price levels in this environment."

His tip is global infrastructure stocks. He sees trends in climate change solutions, such as resource efficiency, that continue to grow in importance. Companies that position themselves successfully here are the winners of the future, he says.

Balteo highlights the opportunities for flexible fixed income in this environment: "We think quality bonds with an average rating of AA and a five-year duration are attractive in this scenario. But volatility remains high, so flexibility remains a key factor."

Scenario 2: The conflict intensifies

In this case, a recession stifles demand and limits oil and commodity prices. The markets experience a more pronounced low phase. In this scenario, inflation will peak as early as around the second half of 2022. Central banks then change course and start easing again.

"We expect diminishing returns and rising default rates in this case", Haubrich explains. "A sell-off in credits and equities is likely then. Only low-risk stocks perform better. Government bonds, on the other hand, are rallying because of the flight to quality."

However, diversification only through bonds is not enough, he said. It can be complemented by liquid alternatives, Balteo says: "Total return strategies such as long/short equities or currency allocations offer convexity." In addition, the strategist recommends European covered bonds. They are backed by real estate values and are considered very safe even in a banking or sovereign crisis. "But the market is very inefficient, so good portfolio management is essential", says Balteo.