{"id":923,"date":"2022-02-18T10:16:16","date_gmt":"2022-02-18T10:16:16","guid":{"rendered":"https:\/\/www.innov8fs.co.za\/blog\/?p=923"},"modified":"2026-03-18T11:46:28","modified_gmt":"2026-03-18T11:46:28","slug":"war-rates-and-recession-we-unpack-everything-with-david-bassanese-and-t-rowe-price","status":"publish","type":"post","link":"https:\/\/www.innov8fs.co.za\/blog\/2022\/02\/18\/war-rates-and-recession-we-unpack-everything-with-david-bassanese-and-t-rowe-price\/","title":{"rendered":"War, rates and recession: We unpack everything with David Bassanese and T. Rowe Price"},"content":{"rendered":"

The volatile start to the year in financial markets is unlikely to abate soon.<\/p>\n

The likelihood of war, record inflation, a looming Fed hike, tightening liquidity conditions, and the unwinding of stimulus \u2014 are all the stuff a volatile market is made of.<\/p>\n

It\u2019s too early to say whether we\u2019ve entered a post-COVID world, but what\u2019s clear is the pandemic no longer seems to be the dominant driver moving the markets.<\/p>\n

The new environment will be difficult to navigate, so\u00a0Stockhead<\/em>\u00a0tries to break it down with an exclusive chat with\u00a0Betashares Chief Economist David Bassanese<\/em><\/strong>, as well expert comments from global fund manager.<\/p>\n

\"\"<\/p>\n

How would markets react if war breaks out between Russia and Ukraine?<\/h3>\n

Bassanese believes that equities could suffer if war does break out.<\/p>\n

\u201cMarkets could possibly react quite wildly in the immediate aftermath of a Russian invasion of the Ukraine,\u201d Bassanese told\u00a0Stockhead<\/em>.<\/p>\n

\u201cEquities would likely slump, bonds rally, and oil and gas prices would surge. The US dollar might also firm up, and the Aussie drops, quite possibly below US70c.\u201d<\/p>\n

Since the talk of war began earlier this year, the Aussie dollar has gone through a gradual decline from a 72 handle to a 71 handle.<\/p>\n

\"\"<\/p>\n

\u201cThat said, I suspect within a day or two markets should settle down. After all, Ukraine represents a tiny part of the global economy (less than 0.5%). Provided the dispute is contained to just Ukraine, it should not derail global economic growth,\u201d Bassanese added.<\/p>\n

But he reckons the likely immediate escalation in oil and gas prices would not help global growth nor inflation outlook.<\/p>\n

\u201cThough at least with regards to oil, we may see OPEC step up production if there are restrictions imposed on Russian oil exports,\u201d Bassanese said.<\/p>\n

Where could oil and gold prices go to in the event of war?<\/h3>\n

\u201cOil could easily break above US$100\/barrel on the news, but thereafter it will depend on what sanctions would be imposed on Russian exports, and how OPEC, in turn, responds with its own production,\u201d said Bassanese.<\/p>\n

But ultimately,\u00a0oil prices are dictated by OPEC today<\/strong>\u00a0after the US shale oil producers ceded control a few years ago.<\/p>\n

According to Bassanese, OPEC is now exercising its market power by letting prices push higher.<\/p>\n

\u201cBut when push comes to shove, I think oil prices will only go as high as global economy will allow them to go,\u201d he said.<\/p>\n

\u201cI don\u2019t see them going to US$150 level for example.\u201d<\/p>\n

\u2018Out of the 21 rate\u2011hiking cycles since 1974, the US equity market has delivered a positive return 17 times \u2014 an 81% hit rate \u2014 in the 12 months after a rate hike\u2019<\/em><\/strong><\/p>\n

Gold prices would also likely rise according to Bassanese, both due to higher oil-induced inflation fears and risk-off safe haven flows.<\/p>\n

\u201cThe only danger to gold would be a stronger US dollar, and a more general flight to liquidity or cash by some investors,\u201d he said.<\/p>\n

For Aussie gas exporter and farmers, war might actually even be a boon.<\/p>\n

\u201cDisruptions to Russian gas supplies and Ukrainian agricultural output could hike prices and open more markets for Australian exporters, at least over the short-term,\u201d Bassanese explained.<\/p>\n

\u201cInstability in the region could also encourage European markets to diversify their sources of supply, which would provide benefits to us over the longer-term.\u201d<\/p>\n

Against this volatile backdrop, could we go into a recession?<\/h3>\n

\u201cI think there is a a risk the US could go into recession at some stage over the next couple of years,\u201d said Bassanese.<\/p>\n

\u201cThis is because their unemployment rate is currently very low, and wages growth very high. So the US is already showing late cycle tendencies (of a recession).\u201d<\/p>\n

Bassanese thinks that unless wages growth slows down from where it is at the moment, we\u2019ll have to be prepared for two eventualities \u2013 a soft landing or a recession.<\/p>\n

\u201cMy base case is not a recession, but the US unemployment rate is at a point that suggests we\u2019re closer to the end of the cycle than the beginning,\u201d he said.<\/p>\n

Global fundie\u00a0T. Rowe Price<\/strong>\u00a0agrees with that assessment.<\/p>\n

\u201cAs the economy is expected to slow, inflation continues to fuel higher costs. Wages, for example, look set to remain high,\u201d a note out of the fundie said.<\/p>\n

\u201cThe more permanent inflation becomes, the bigger dent it will have on consumer confidence and, ultimately, on consumer spending and corporate profits,\u201d it concluded.<\/p>\n

\"\"<\/p>\n

Could the Fed engineer a soft landing?<\/h3>\n

The current debate in the market is whether the Fed will start off with a 25bp or 50bp hike in March, and that itself is causing some of the volatility.<\/p>\n

Although the Fed clearly needs to raise rates to combat inflation, it\u2019s difficult to anticipate how aggressive its hiking cycle will be.<\/p>\n

\u201cI don\u2019t think they will go with a 50 basis point hike, that would be too much of a jolt and I don\u2019t think it\u2019s necessary,\u201d Bassanese said.<\/p>\n

\u201cAt the moment, economists are competing against each other as to who has the most aggressive Fed forecasts, and I think that\u2019s a bit silly. Nobody can be absolutely clear but for me, I believe there\u2019ll be at least three and possibly four US Fed hikes this year,\u201d he said.<\/p>\n

Whatever the Fed decides, T. Rowe Price reckons a Fed hike would not impact equity markets too adversely.<\/p>\n

\u201cWe can observe that Fed rate hikes alone do not usually derail financial markets,\u201d says the T. Rowe Price note.<\/p>\n

\u201cAnalysis shows that out of the 21 rate\u2011hiking cycles since 1974, the US equity market has delivered a positive return 17 times \u2014 an 81% hit rate \u2014 in the 12 months after a rate hike,\u201d it concluded.<\/p>\n

If a recession does happen, how low could we go?<\/h3>\n

\u201cIf it\u2019s just a correction without a recession, I think the market\u2019s fall could be limited to 10 to 20%,\u201d Bassanese said.<\/p>\n

\u201cIn a correction like that, it would just be a valuation adjustment because what would pull the markets down is the P\/E ratio if earnings do hold up.\u201d<\/p>\n

Under that scenario, what we would see is a rotation where Energy and Financials may show some positive gains, and the high growth Tech sector may fall.<\/p>\n

\u201cBut if it was a deeper bear market like more than a 20% fall and the talk of recession builds, then very few stocks could offer a safe haven as they will all be under pressure,\u201d Bassanese explained.<\/p>\n

\u201cUnder that recession scenario, defensive stocks like consumer staples, utilities, health care may do relatively better. But generally speaking in a bear market, all stocks face downward pressure.\u201d<\/p>\n

    \n
  1. Rowe Price argues the supportive factors that pushed equities to record levels in 2021 are now waning.<\/li>\n<\/ol>\n

    In response to the Fed\u2019s policy update, the Treasury yield curve has now flattened to levels not seen since 2019\u20132020.<\/p>\n

    \u201cThe shrinking spreads indicate that investors are becoming more pessimistic, and are sceptical that the Fed can raise rates as much as it would like without crossing the line from slowing to damaging the economy,\u201d said the T. Rowe Price note.<\/p>\n

    \u201cWhile it is too early to talk of a recession, the possibility of an economic slowdown beyond what has been priced into financial markets seems to be increasing.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"

    The volatile start to the year in financial markets is unlikely to abate soon. The likelihood of war, record inflation, a looming Fed hike, tightening…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4],"tags":[],"class_list":["post-923","post","type-post","status-publish","format-standard","hentry","category-innov8ions"],"_links":{"self":[{"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/posts\/923","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/comments?post=923"}],"version-history":[{"count":1,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/posts\/923\/revisions"}],"predecessor-version":[{"id":927,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/posts\/923\/revisions\/927"}],"wp:attachment":[{"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/media?parent=923"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/categories?post=923"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/tags?post=923"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}