Hello. My name’s Keith Lerner, Co-Chief Investment Officer for Truist Wealth.
And today we want to provide an update as far as the unfolding activities we're seeing in Russia and Ukraine and our view on the market and economic implications.
But first and foremost, we also want to acknowledge that this is a human crisis and our thoughts and prayers are with the people of Ukraine.
Joining me on today's call is our senior global strategist Eylem Senyuz and he'll cover the global economy and I'll cover the market view.
But a couple of key points up front heading into this year:
Our view was the global economy was on solid footing with some momentum.
This complicates that outlook, but we still don't think recession is the base case and we think the same in the US. The US had a lot of momentum coming into this year. We think this likely slows things down somewhat, but we think the US economy still moves forward from an equity perspective.
We're viewing this as a correction within an ongoing bull market. We expect the markets to remain very volatile, very headline driven, and we think this is going to take some time to work out. But we still think the trend over the next 12 months is one that is higher.
So first to discuss the implications from an economic standpoint, let me now turn it over to Eylem Senyuz. Eylem?
Thank you, Keith. This is Eylem Senyuz covering global markets for Truist Wealth, and I'll start with our global macro-economic outlook. And like Keith mentioned last year, globally, we had a very strong year. Matter of fact, it was the fastest economic growth rate within the IMF data set that goes back to the 1980s after the super-fast growth year.
Of course, we expected that slower year relative to last year, but still much higher growth rates than the average economic growth rates we've experienced during the last decade and actually even faster than the averages we've seen two decades ago.
This expectation was valid until the invasion of Ukraine by Russian forces. The first set of sanctions were manageable, but the new list of sanctions that was introduced over the weekend will put Russia, especially from the US point of view, on par with the countries like Iran and North Korea and Venezuela.
Excluding some Russian institutions from the global banking messaging system called SWIFT is one thing and still manageable from Russia's point of view. But targeting the Russian central banks, foreign reserves took the economic side of the crisis to another level.
Eventually, Russian banks would need capital, and Russian corporates would need US dollars to pay their debt. But if the Russian federal government cannot provide them the dollars these institutions need, they will have to default on outstanding obligations, which could create cascading defaults in Russian markets.
The new list of constraints that were put on the Russian economy is expected to have an effect not only on the Russian economy but also on the global economy.
The European economies are at the epicenter of this crisis due to their proximity, and also the Russian economy is much more intertwined with the European economies, and untangling that relationship is going to be costly for them.
So the European economies, which we include all 27 countries of the European Union, the UK and Switzerland into this, and we also include Russia and Ukraine into the picture and the current events definitely confirmed one more time that these two economies are very connected with the European economies.
We also include Turkey, the country that has a customs union with the European Union and has wanted to be a member since 1999. Anyways, this group in total has a similar total GDP to the US.
Roughly twenty four percent of the world's GDP is coming out of Europe, and the consensus growth rate out of Bloomberg is at three point nine percent for this region, which is very high with what is going on. Currently, the numbers are still up in the air with current sanctions against Russia and the uncertainties related to the, you know, Russia's military operation in Ukraine. But if you have to guess numbers, these numbers will get downgraded probably be below three percent growth rates pretty fast pretty soon.
And when you look at the emerging Asia with two leading countries, India and China and all countries around the two, this group had a very strong year last year at 7.3 percent average growth rate. But this year, things are slowing down with visible slowdown in China, and Omicron wave is causing this crop disruptions not only in China, but also in Southeast Asia as well. And the initial reading for India's growth rates look very strong for this year, and the country may even reach 10 percent growth rates this year. But even with that, Asia's growth rates on average could be around 5.2 percent, which is greater than both the US and the European growth rate.
The US, which is roughly 25 percent of the world's GDP and expected to grow in a range of three and a half percent to 4.2 percent, and the expected growth rate of the US economy got slightly downgraded recently, but still a very strong growth rate versus historical averages. And also, you know, long term projections when you look at the long term projections for the US economy, it is one point eight percent. So even if we get our lower end of projections at three point five percent, it is almost a double of an average economic year that we expect out of 2022.
And if you look at the yields globally that are coming down and the expectations of Federal Reserve with hindsight coming down as well for the year, we canceled four rate hikes. And before the Ukraine crisis, some market participants expect up to nine consecutive hikes this year, including a maybe a 50 basis point increase at the March meeting or a surprise spike in between meetings. Those expectations adjust that significantly due to geopolitical risks.
Now, with consensus coming back closer to our projections again, in short, like Keith mentioned, we continue to expect a strong economic year if Ukraine situation comes down and negotiations for a stable, you know, peace process starts soon.
And even in that scenario, we don't expect that the current sanctions would be lifted any time soon unless there is a leadership change in Russia. Therefore, we expect slower growth rates in Europe and some emerging market countries that are close to Russia.
But the US is in a unique situation with relatively small amount of trade with Russia and produces its own energy and operates its own reserve currency and controls the rates and moving on to the next slide to show you Russia's trade balance and exports and imports. Last year, Russia had close to $200 billion worth of trade surplus, and the country accumulated over two trillion dollars-worth of surpluses since 2010.
And these surpluses are funding the military campaign that they have against Ukraine right now, and China is the main trading partner of Russia, and probably this year these numbers will be even higher. And Europe, in totality, it trades with Russia much more than China. So we expect supply related disruptions related to the military campaign that they have in Europe.
And moving to my last slide just to show you the importance of Russia and Ukraine in global trade and economy. Russia is sanctioned so goods or services will have a hard time to move in and out of the country. Not only that, everything stopped in Ukraine, so the country is in war zone right now and in terms of ranking in numbers. Russia is world's number one natural gas exporting country and number two for platinum and palladium and oil and cobalt, and number three for gold and aluminum and nickel.
The list goes on and on, and similarly, Ukraine, with 40 million population and very fertile flat land that they have. It is one of the world's largest exporter of grains and potatoes and pumpkins and peas.
They also have some mining assets, too, so removing this country from global markets will have repercussions effect on global food prices. With that, I conclude my session.
I believe, Keith, your back.
Great, thanks so much for that overview, Eylem.
And you can understand from what Eylem discussed, why global markets have been under pressure.
And if you look at the concerns or more of the bear case or negative case, this invasion is foremost in investors' minds. Before this, and even currently, there's also concerns about the Fed starting to raise interest rates, taking away some of the liquidity from this this market.
There's ongoing concerns of COVID coming back at some point and then inflation is also remaining front and center, so you can see why there's some gloom in the overall market. That said, you know, in our view, there’re some important offsets, even though everyone's kind of focused just on the bear case, let me present some of the positive offsets to the right.
So the first thing that's important is when we've studied these historical geopolitical events, they tend to have a short term impact on the market. But historically, markets tend to rebound as long as this does not push the economy into recession. As Eylem just mentioned, especially in the U.S., we think recession risk is still relatively low. It doesn't mean there aren't risks.
We just think the recession risk is still relatively low.
The other side on the Fed and he pointed this out, there's been a lot of concerns about the Fed moving very aggressively. This likely means they go at a much more moderate pace, at least until this abates. And then I think what's underappreciated is last year, in the last few years, there was so much attention just on the COVID trends, and now we're seeing a sharp improvement in those trends.
And regardless of the events overseas, we still think that that in the US, people are going to travel, stay at hotels and the service side of the economy is going to be very strong, especially as people, you know, move out and get out and travel.
And then on the last side of this is inflation is still an issue. It's sticky.
But the good news so far is we're seeing companies have pricing power and are able to push those prices through, and that's resulting in earnings that continue to push higher.
So again, I just want the main message is, you know, the risk reward is more balanced now, but it's not just one-sided.
So let's spend a couple of minutes on the next slides just talking about these geopolitical events, and every one is a little bit different.
But what we did is we study 12 different military crises historically. And what we found is, again, short term markets tend to have a negative reaction to them, as one would expect. But as you move out six to 12 months later, the odds of the market rebounding improve. In fact, on the 12 month basis, stocks have risen following these crises nine out of 12 times, with an average gain of over eight percent in every single one of these crises, where these prices, as you know, there was bad news. There's a lot of gloom in, you know, gloom out there. But again, that what we found when we looked at the studies, as long as the economy does not go into recession.
Markets tend to rebound and that is our base case today as we move to the next slide just for a little bit more context as well as you're looking at a chart of the S&P 500 since 2009, along with every five percent correction that we've had.
And believe it or not, since 2009, this is the 25th pullback of at least five percent, somewhat deeper somewhere, you know, longer in duration. But I will tell you, every single one of them came with bad news, and I'm sure a lot of these we were writing about.
And you know, if you look back at the chart, you may have forgotten what causes the admission price to being in the market. Is this volatility? But what's also important about this chart is since 2009, despite those twenty five corrections, the market is up over 500 percent.
So that's just something to keep in mind that, you know, this is, you know, again, the admission price to being in the market is never comfortable, but it is part of the deal when you invest in equities and the potential for higher long term returns as we move to the next slide.
Thinking a bit more about, you know, we're already down low double digits, where do we see downside? So one way of looking at that is we look at the market or the S&P 500, and we overlay that with different what we call fundamentals support levels. Meaning as a market pulls back, where do we think buyers may step in to support the market?
What was notable is more recently, as the market pulled back during the invasion, initially stocks found good support or investors stepped in around their valuation of 18 times forward earnings. And if we think about coming into the year, the market was at it at a valuation of over twenty one time, so we've seen a pretty sharp correction.
That doesn't mean the market's cheap, but on a relative basis, we still think somewhat attractive in our view based on.
What we know today, we think the downside is likely limited to about a 17 multiple in this market because on a relative basis, stocks still look attractive to where interest rates is, and especially along with our base case that that the economic expansion continues as we move to the next slide.
As far as you know, just to kind of think about some context, the entire decline this year has been based on fear.
In one way we can look at that is the chart that you're looking at now looks at the overall return for the market year to date, so again, down double digits.
But what you're seeing is the valuations are down even more.
What's notable, and I think underappreciated, is the earnings trend.
The one on top is still moving higher. So again, this year during this entire episode so far, we're still seeing earnings move forward. And I wouldn't discount corporate America's ability to adapt.
Think about what we just went through during the pandemic. Despite all of those challenges, we saw that corporate America was able to adjust and profits moved to two all-time highs.
As we move to the next slide, as far as positioning, Eylem brought up that the US is not immune, but we've had a long standing overweight to US equities because we look at it as a big blue chip country. We think the economy is on more solid footing relative to the globe.
And again, the companies of our higher quality, the chart that you're looking at shows these various markets overseas relative to the US. When the line is declining, it means these markets are underperforming the U.S. and at this point, we would reiterate our preference or underweight position in international markets, including areas like Europe and emerging markets and areas like Russia. And you can see more recently that all of these markets have significantly underperformed the US during this uncertain period.
Now I will say if this if we see some resolution quick on this, these markets will also snap back quicker. So we still want to have some exposure there.
But again, we want to have a higher overall weighting to the US markets.
So to conclude our discussion today, we do think this complicates the global economic recovery. We think it slows it down.
We do think the US is in a better position to absorb this. It will likely slow the US economy down somewhat, but we're still looking for healthy economic growth and from a stock market perspective, we're looking at this as a correction, a difficult correction within a bull market trend.
We think this volatility continues near-term. But ultimately, if the economy continues to expand, profits should move up. And we think later in the year we could see a rebound.
The other thing that's really important at times like this is not to lose sight of your long term goals. Most of you are investing for goals over the next three, five, 10, 20 years, and you're investing for a period over time, not just a point in time.
There's always going to be something as far as headlines and a reason to sell. You know, selling during panic typically isn't a winning strategy. We would really encourage you to reach out to your advisor to discuss if anything's changing in your goals and how the way we're looking at the economy and markets impacts you directly. As we get new information, as the data evolves, we certainly look forward to keeping you abreast of our views.
And we want to thank you again for spending some time with us today.
Truist’s Investment Advisory Group provides our latest view on how the ongoing developments with Ukraine and Russia impact our global market outlook and positioning.