PETALING JAYA: While emerging markets are, on balance, weakened by the effects of the Russia-Ukraine conflict, the economies that can absorb higher food and energy prices (such as Singapore and Malaysia) or those with least exposure to liquidity shocks (such as Indonesia and the Philippines) could be outperformers.

       In a market note, Manulife Investment Management global chief economist and head of macroeconomic strategy Frances Donald said due to the conflict, it was also likely that global export momentum slows somewhat, and so those economies less reliant on foreign demand may enjoy a mild relative advantage.

       Donald said the conflict and its repercussions amount to a stagflationary economic shock, which is hitting the global economy at a moment in which it was already suffering from painful inflation and signs of a growth slowdown to come.

       She pointed out that the conflict added conviction to the global wealth and asset manager’s existing call that the first half of 2022, particularly the second quarter, could be mired in stagflationary dynamics (lower growth, higher inflation), persistent volatility, and more frequent bouts of risk aversion.

       Malaysia, Singapore able to absorb higher food and energy prices.

       “It also lowers our conviction that the second half of 2022 will be an easy return to a Goldilocks scenario (stable growth and lower inflation),” said Donald.

       Citing a recent market note by Manulife Investment Management head of macro strategy (Asia) Sue Trinh, Donald noted that Russia has a critical role in commodity markets.

       Russia is the world’s leading exporter of natural gas (17.1% of global production) and the second-largest exporter of crude oil (12.1%). For context, Saudi Arabia accounts for 12.5% of the crude market.

       Russia and Ukraine are also significant agricultural producers: Their combined wheat, barley, and maize exports represent 21% of the global total, and together they supply 60% of the world’s sunflower oils.

       Russia and Belarus also account for 20% of total fertiliser exports, which is vital for global food production.

       Meanwhile, Russia is one of the world’s largest producers of critical metals. It’s the biggest exporter of palladium (20.7% of total volume) and ranks second after Chile in terms of refined copper (7.1%).

       The country also holds the third position for nickel (11.2%) and aluminum (9%).

       Donald explained that the second-order impact of sharply rising energy and food prices is a growth shock, as energy demand has notoriously limited elasticity.

       “That is, even if gas prices or heating costs soar, we still need to get to work and to stay warm, and consumers either have to use savings or cut back in other areas of spending. This is on top of negative real wage growth and weak consumer confidence data in most major economies,” she said.

       Donald added that the United States’ personal income data, also out this week, showed income rose 0% month-over-month, and spending only rose off the back of declines in the savings rate.

       “That’s not a healthy consumer backdrop for experiencing another price shock. We expect to be thinking much more about the global consumer’s exposure to energy in the weeks ahead,” she said.

       Donald said while expectations are that high costs would cramp growth, the Russia-Ukraine conflict compounds the issue and is consistent with ongoing yield curve flatteners.

       “It also potentially throws a wrench into our expectation that inflation would begin cooling after February and would sharply decline to 2% in most major economies by year end. We’re still comfortable with the path of that decline, but its speed may be affected by these tensions,” she added.

       Donald noted that combined with supply chain disruptions that may limit inventory rebuilds that we hoped would fuel growth in the second half of 2022, the global wealth and asset manager’s call for a return to Goldilocks by year end is looking less than solid.

       Meanwhile, Donald continues to believe the US Federal Reserve (Fed) can hike three times this year in total, along with quantitative tightening, whereas the market is still pricing in six to seven hikes in the next 12 months.

       She noted that the Fed is once again in a situation in which inflation is coming from global and supplyside developments, and interest-rate hikes will do little to cool energy-driven inflation precipitated by geopolitical developments.

       “The biggest reason we expect the Fed to pivot more dovishly this year is because we expect the narrative to turn away from high inflation toward low growth.

       “And if we’re correct that the Russia-Ukraine conflict will compound the growth shock, then we have even more conviction in our call that the market is overpriced – both in that it still has a 20% chance of a 50-basis-point hike priced into March but also because of how much tightening it believes the Fed will engage in over 2022.

       “Should the Fed pivot, it will be able to re-steepen the curve, which is desperately needed, and support an extension of the cycle,” she said.

       Donald also expects the theme of global desynchronisation to become more important over the course of 2022.

       While the stagflationary shock emanating from the Russia-Ukraine conflict is global in nature, its effects will be felt unevenly around the world. In terms of major macro economies, Europe is most exposed to the growth destruction from higher energy prices, given its natural gas exposure and existing weaknesses.

       “Indeed, recession odds for Europe will climb in the coming year (although recession isn’t our base case),” she said.