2022 Global Market Outlook – Q2 Update: Dented, Not Derailed

The Russia-Ukraine war adds to near-term growth risks for the global economy and will likely keep inflation elevated for longer. While uncertainty is high, we believe equity markets are oversold and should recover if tensions ease in the coming months.

Key market themes

Russia's invasion of Ukraine creates near-term risks for markets, but also casts a shadow over the longer-term outlook. The immediate threat comes from high energy prices, rising food prices and disrupted supply chains. The longer-term issues are a new cold war between Russia and the West, increased military spending and a further blow to globalization. The war is a defining moment for Europe, which now needs to unwind decades of Russian energy dependence, accelerate its sustainable energy transition and rebuild military capability.

We believe the invasion will lead to lower global growth—with Europe taking the largest hit—as well as higher inflation. Even so, we think global growth could still be above-trend this year, provided the hostilities ease and global energy prices stabilize. While above-trend growth should support equities over bonds and cash, the war in Ukraine has created significant uncertainty, which likely means more market volatility.

We expect the U.S. will be among the most resilient economies to the conflict globally, given its energy independence and lower share of commodity consumption in GDP (gross domestic product). In addition, with interest-rate hikes now priced for every remaining U.S. Federal Reserve (Fed) meeting in 2022, we see this as a maturing risk factor to markets.

In Europe, the invasion of Ukraine has created significant uncertainty, with the main risk coming from energy prices—due to the region’s dependency on Russian natural gas and oil. A decision by Russia to shut down energy exports to Europe, or by European governments to boycott Russian energy, could trigger a recession. In our view, this seems unlikely, given Russia's need for oil and gas revenues and Europe's reliance on Russian energy—but we don't think it can be ruled out. On the other hand, a short-lived shock to energy prices could lead to a recovery in European economies during the second half of 2022. This outlook would likely allow the MSCI EMU Index—which reflects the European Economic and Monetary Union—to recover.