Outbreak of peace could create a “peace dividend” that lifts lowers risk aversion and allows global asset prices to surge?

The horrendous cost in human lives, the cost to the world has been slower growth, higher inflation, higher policy rates and asset price destruction. For financial markets, there seem to be two particular questions.

The first is whether certain adverse developments in the conflict, such as Russia “winning” the war, or expanding its quest to another country, could still create a surge in global risk aversion and an asset price implosion after all this time.

And the second, more optimistic question is whether a sudden, and admittedly surprising, outbreak of peace could create a “peace dividend” that lifts lowers risk aversion and allows global asset prices to surge? In Mr. Steve Barrow, Head of Standard Bank G10 Strategy’s view, the answer is “no” on both counts.

To differing extents, all shocks, such as Russia’s attack on Ukraine, are essentially “forgotten” by financial markets given time, even if they linger on. Of course, we don’t actually mean forgotten; just that their ability to influence market pricing declines the longer the disturbance continues. This being said, new shocks, such as a military victory for either side, or Russia pushing into another country (or countries), could conceivably fan the flames of asset price volatility again.

However, Mr. Steve Barrow doubts that this will happen. For a start, it seems difficult to envisage that either side can genuinely win the war militarily: Ukraine does not look like it can push Russia out of the regions it occupies in Crimea, and Russia does not look as if it can take the whole country and install its own leaders. This could mean that the battle rages with little progress made by either side, as now, and this would allow financial markets to get on with looking at other things, like central bank policies, recession risks etc.

“Russia will try to expand the conflict given that its great obsession over many decades has been with Ukraine. And while it might see other former Soviet Republics as ‘puppet states’, as it sees Ukraine, we don’t think this implies that it will attack them too. We also believe that the conflict continues whether or not President Putin is there to oversee it”, said Mr. Steve Barrow.

For while, there is undoubted speculation in the West that Putin’s disappearance from the scene, for whatever reason, could lead to some wholesale re-thinking of Russia’s strategy in Ukraine, Mr. Steve Barrow finds this unlikely. The bottom line is that while all sorts of new twists and turns in this conflict could occur this year, we rather doubt that any will happen that force their way onto the financial markets radar screen in a negative way.

What about on the other side of the equation? Could a sudden “peace” break out that creates a significant peace dividend for global assets like stocks and bonds? Mr. Steve Barrow is sceptical. He is not just sceptical that there will be progress towards a peace deal at this stage. He is also suspicious that any such outcome can materially usurp other factors as being key to global asset performance.

“We say this largely because the damage has been done already, both by Russia’s actions in Ukraine and the subsequent reactions by many governments and companies around the world, such as sanctions”, said Mr. Steve Barrow.

For instance, a peace deal is not going to make Europe rush back to buy pre-crisis levels of Russian oil and gas. The sanctions imposed by the West would likely persist as well, not least because the US hegemon will want to maintain a hostile message towards China as it too faces its own issues over Taiwan. Of course, Mr. Steve Barrow doesn’t doubt that a sudden surge of optimism over a peace deal would deny financial assets a knee-jerk rally, but that’s all it would be in his view. And with peace seemingly unlikely at this stage, it seems far more probable that the conflict in Ukraine will persist as a background factor for global asset prices, with much more focus on how policymakers like central banks are coping with the fallout from the conflict that started almost a year ago.