The weakness of global stock markets since the beginning of the year confirms a tectonic upheaval that was already apparent before the Russian attack on Ukraine. The cause is a new investment environment with structurally elevated inflation, which was already apparent in 2021. This constellation is now acutely exacerbated by the geoeconomic consequences of the Ukraine war, he said. "Looking at the big picture, the capital markets are facing a real turning point - towards looming resource scarcity and increased inflationary pressure. The current corrections are therefore not a brief blip, but the beginning of a tectonic market shakeout," said Dr. Heinz-Werner Rapp, board member and chief investment officer of FERI, at the digital annual press briefing.
The interplay of monetary and geopolitical trends has already created the conditions for a structurally inflationary market environment for some time, he said. The focus here is on the massive money creation by major central banks, which was again dramatically expanded in the wake of the Corona pandemic. With the war-induced price increases for gas, oil, wheat and important industrial metals, inflation is now finally becoming a game changer on the markets. In addition, Russia's economic isolation was increasing the risk of renewed disruptions to global supply and delivery chains. "The Ukraine conflict is exacerbating the process of progressive deglobalization and creating a radically new geo-economic reality," Rapp explains. Investors now need to prepare not only for a changed interest rate environment, but also for the uncertainties of a renewed cold war: "The overall scenario is currently changing radically. The risk of stagflation, i.e. a situation with weak growth and high inflation at the same time, is already looming on the horizon. This perspective is extremely challenging, especially for the stock markets, and has yet to be understood and priced in," says Rapp.
The significant increase in inflation risk also has consequences for the global economy. The European Central Bank recently raised its inflation forecast from 3.2 to 5.1 percent. However, model calculations by FERI show that this is still likely to be too low. With the prices for oil, gas and other raw materials already at their current levels, the inflation rate in the euro zone is likely to average more than 6 percent for the year. FERI considers it unlikely that it will fall below the 2% mark again in the medium term, as the ECB still assumes, because there were already a number of inflation-boosting factors before the Ukraine war. If there are indeed reduced supplies of oil and gas from Russia to Europe, a further price surge is to be expected, which could catapult inflation close to the 10% mark. Because high inflation rates act like an additional tax on consumption, a moderate downward revision of growth forecasts would no longer be enough. Rather, the upswing as such would be in question. "This exacerbates the ECB's dilemma: To fight inflation, it would probably have to do more than more rapidly scale back its bond purchases, as it has now announced. Looking at the economy, however, that is precisely what could prove to be an additional recession driver," said Axel D. Angermann, chief economist at FERI Group.
Against this backdrop, he said, the equity markets are facing a real turning point that could herald the end of the ten-year bull market. For the bond markets, too, the emergence of structural inflation would mean a strategic reversal. The looming regime change in the global capital markets is a drastic event that demands the utmost attention and strategic foresight. Concepts such as "buy and hold" in equities would then clearly lose their effectiveness. "As both equity and bond markets come under pressure in the future, active multi-asset management will become indispensable. Professional investors should diversify their portfolios very broadly in the future and hedge against geopolitical risks and inflation with gold or commodities," said Dr. Heinz-Werner Rapp.