Four scenarios: from least to most positive for risky assets
1. Escalating conflict, no agreement in sight
In this first scenario, both sides stick to their positions. The Ukrainians do not lay down their arms and the Russian strikes intensify. The Russians use other, more destructive weapons and the collateral damage is significant. Negotiations are continuing, but there are still major differences between Russian demands and what the Ukrainians are prepared to discuss. In this context, we have probably not yet reached the peak of international sanctions against Russia. It is not excluded in this scenario that Europe would impose an embargo on Russian oil and gas exports, causing a further rise in energy prices and plunging Europe into recession. Financial markets would react negatively to these additional sanctions, which would affect European energy imports that have so far escaped sanctions. Risky assets would continue to suffer, the euro would depreciate further, and risk-free rates would fall. In this scenario, investors should favour quality and self-sustaining growth stocks over cyclical and low-value stocks.
2. Status quo in the conflict
The second scenario, the status quo, describes a situation in which the conflict stalls. Moderate additional sanctions remain possible. In this scenario, European economic growth slows down, due to previous increases in commodity prices. Financial markets remain volatile, with no significant further decline in equities materialising. Risk-free rates remain around their current levels and the dollar remains high. In this environment, stocks of quality companies with autonomous growth are to be favoured.
3. Escalation of the conflict with possible agreement
The intensification of the Russian offensive and/or a certain stalling of the Russian army finally allows for progress in the negotiations. In this scenario, the Ukrainians and Russians reach a compromise, and a ceasefire agreement is reached. The withdrawal of Russian troops from Ukraine could lead to a partial lifting of sanctions. Commodity prices fall in response to this agreement and European economic growth slows but remains more resilient overall than in the first two scenarios. Global equities rebound in this scenario and European cyclically sensitive equities rise in price to a greater extent. Risk-free rates rise again, as markets anticipate more rate hikes from central banks in response to this reduced risk.
4. Towards an immediate agreement
This scenario is similar to the third scenario described above, except that the agreement is reached more quickly. In this case, the rise in commodity prices would only be temporary. Its impact on European economic growth would therefore be more limited than if the conflict were to be prolonged. Some of the sanctions are lifted more quickly and economic growth is ultimately only slightly affected by the war. In this context, the value style is to be preferred.
Our four possible scenarios for the evolution of the war in Ukraine: