Financial markets trying to discount changing news flow: Rabobank Intl

The accommodative RBI policy, combined with fiscal stimulus and (further) increase in energy commodities, particularly oil, increases the odds of high inflation, say Lambregts and Eijkelenburg

Global financial markets have been on edge, following escalation in geopolitical events in Russia and Ukraine. JAN LAMBREGTS, managing director and global head of financial markets research, Rabobank International, and WOUTER VAN EIJKELENBURG, its economist, tell Puneet Wadhwa in an a interview that the accommodative Reserve Bank of India (RBI) policy, combined with fiscal stimulus and (further) increase in energy commodities, particularly oil, increases the odds of high inflation. All this and the depreciation of the rupee might deter investors from investing in India. Edited excerpts:

Do you see more pain across global financial markets, given the Russia-Ukraine crisis? Which equity markets/economies will be the most impacted?

Lambregts: The short answer is, yes. The risk of a Russian invasion of Ukraine has shifted from being a remote tail risk to a main-risk scenario. Financial markets are trying to discount this changing news flow and catching up with the negative narrative, but they generally struggle to correctly discount these kinds of scenarios. 

The economies most impacted will obviously be the ones closest to the fire: Ukraine, Russia, and Belarus, where both disruptions from war and sanctions will be meaningful. Among major economies, the Eurozone is the most exposed, and within it those that rely the most on Russian energy, wheat and barley, fertiliser, and metals.

Market experts see the US Federal Reserve (Fed) hike rates by 25 basis points (bps) in March. Do you think the hike could be lower — say 10 bps — which can see a surprise rally across equity markets?

Lambregts: If anything, the Ukraine-Russia state of affairs shows us that curveballs and surprises are possible. Yet at the moment, the Fed’s on a clear course to tighten, and the discussion is more about whet­her it’ll go for 50 bps (instead of 25 bps).

How do you see investor flows play out in 2022 as the Fed and other central banks look to hike rates?

Lambregts: In a rising rate environment, developing markets (DMs) tend to be more resilient than emerging markets (EMs). Again, we’re likely to see this dynamic play out, bearing in mind any lingering impact of Covid-19 is likely to weigh on EMs more than on developed ones.

Which factors, in your view, can bring the focus back on EMs?

Lambregts: Relative outperformance of DMs is a possibility, say vis-à-vis EMs, albeit the challenges lining up across the board.

How big a threat will bond markets/yields be to the stability in equity markets across the globe amid rate hikes over the next few months?

Lambregts: Central banks are making it abundantly clear they are now inflation fighters first, and employment and growth providers second. Quite frankly, when the economic factors change, they are likely to change their mind. With plenty of challenges around and the risk of high inflation and geopolitical events weighing on growth, there may be normal market forces gathering to keep yields in check.

How does India look as an investment destination amid these developments?

Eijkelenburg: In case of further escalation in geopolitical issues, investors generally turn to safer havens at the expense of EMs. Furthermore, we see an increase in differentiation among EM central banks and the government’s policy to recover from the pandemic. The accommodative RBI’s monetary policy, combined with fiscal stimulus and (further) increase in energy commodities, particularly oil, increases the odds of high inflation. All this and the depreciation of the rupee might deter investors from investing in India.

What is your take on key commodities — agriculture, gold, crude oil? Will investors be better off investing in related plays in 2022 to take advantage of high commodity prices?

Lambregts: All of these are under upward pressure, in most cases both from direct factors related to the Ukraine-Russia conflict, as well as varying market-specific issues. Importantly, in a rising inflation environment, there is also more money being put on hedging inflation risks, which ironically push up these prices further.