Although Russia’s bloody aggression in Ukraine has lasted for more than a month and a speedy peace agreement is unlikely, international securities markets have remained surprisingly peaceful. The Euro Stoxx 50 index, which tracks the share prices of Europe’s largest companies, fell by only 0.6% in March. The global stock index MSCI World rose 3.7% last month, and the S & P500 index, which reflects the value of the largest listed companies in the US, rose as much as 4.7%.

According to UN economic experts, the war in Ukraine continues to hit the world economy hard, slowing global economic growth by 1% in 2022. The negative effects of war are manifested mainly through three channels. First, higher commodity prices are fuelling an already strong and accelerating rate of inflation, which is reducing consumer incomes and, therefore, demand. Second, foreign trade has been hit, and the supply chains of European companies, in particular, have been disrupted. Third, corporate and investor confidence is declining, which may adversely affect the availability of capital and the prices of assets in the long run.

Is it worth buying when there is blood on the streets?

Stock markets have become increasingly ignorant of geopolitical risks in recent decades. In the past, the saying “Buy when there is blood on the streets” or “Buy when you hear gunshots” meant it was possible to buy cheaply when everyone was selling. Recently, however, the masses have begun to take old sayings literally. Despite the bloodshed and gunfire, stock markets are still close to record highs, and the original meaning of these recommendations has been turned upside down.

In my opinion, the current optimism of investors is unfounded, even if the most positive scenario materialises and the Russian army is forced to withdraw from Ukraine soon. The effects of sanctions will not disappear quickly, and it is naive to hope that energy and food prices will fall anytime soon. The historical parallel is the 1973 oil crisis: The Arab countries lost the war but caused a global energy crisis, which significantly damaged the economies of the winning countries.

Can the anti-inflationary pill be bitter?

In the US and UK, rising prices are starting to create a wage-price spiral. In Europe, this risk is much lower due to various migration trends.

As long as real interest rates remain at record lows and more than 5% on the negative side, it is unlikely that inflation can be brought under control. In the 1970s, the backbone of price growth in the US was only broken when the then central bank president, Paul Volker, raised interest rates sharply. Interest rates peaked in 1981 at 20%.

Whereas in the 1970s, the value of US stock markets was about 40% of the country’s GDP, now this ratio is about five times higher, reaching 200%. This means that Americans’ economic security these days depends more than ever on stock prices.

In the wake of the 2008 financial crisis, central bankers sought to exploit the so-called wealth effect, helping stock markets to rise to kick-start the economy. At present, the idea that the easiest way to control inflation is to turn the wealth effect upside down by causing stock markets to fall seems to gain popularity.

Read (see) the opinion of Bill Dudley, a former senior official of the US Federal Reserve, here. It seems that the “put option” distributed free of charge by the central bank, which investors expect after a financial crisis, has suddenly become worthless. So far, central banks have helped investors whenever there is the slightest downturn in the markets. Still, now they seem to play with the idea that falling prices of financial assets would help curb the price rise for goods and services.

Where could we find asset growth?

I believe that the world is on the brink of great change. Several trends that have lasted for decades are slowing down or even reversing. Deflation was feared two years ago, but inflation is now at its 40-year peak in both the US (8.5%) and Germany (7.3%). Short-term interest rates, which the central banks essentially set, still remain extremely low: the 1-month Euribor is still around –0.5%.

Long-term bond yields, which central banks cannot control to an equal extent, as demand and supply also play a role, have started to rise slowly and have gone up by around 1.5 percentage points in both Europe and the US over the past two years.

In a changing and uncertain situation, investors have begun to reassess the ability of a company or project to provide the projected cash flow and the ability to raise the prices of products and services in the event of higher wage costs or price rises for input products and services. The changing environment can also mean that we cannot continue the old way but have to look for and test new, and hopefully better, solutions.

The war in Ukraine is also forcing us to think more about energy security and is likely to accelerate the move toward new energy solutions. The supply chains of many other industries have also been disrupted. I had long since lost interest in companies in developing countries and focused on the stock markets of developed industrial countries, especially in Europe. However, recent years’ developments are likely to force us to reconsider this attitude. I suspect that the ongoing processes will have a significant impact on international trade and capital flows.

Complex and difficult times highlight the pros and cons of both society and people. Although I am quite pessimistic about the near future, I still believe in the ingenuity of humankind and our ability to finally find a solution to complex problems. I hope that the current energy crisis will accelerate a wider uptake of renewable energy and speed up achieving a carbon-neutral economic model.

Difficult times also separate the grain from the chaff. Weaker business models and companies will disappear and make space in the market for stronger and more innovative companies. If we look at the Estonian business landscape, the role of Estonian technology sector companies with global ambitions is growing rapidly. This is also reflected in LHV pension fund portfolios.

Ten years ago, investing in Estonia mainly meant buying shares in the Tallinn stock market. Today, LHV pension funds have invested in companies in the early growth phase through local venture capital funds to about an equal extent with our investments in the Tallinn stock market companies. The success of the younger generation of Estonian entrepreneurs has been impressive, and it is especially positive that they, in turn, support the next wave of entrepreneurs. This is how success stories produce new success stories, and I am confident that the share of new and innovative Estonian companies in LHV pension funds will continue to grow.

LHV pension funds have invested and will continue contributing to the Estonian economy. In the midst of the current geopolitical crisis, the recognition that Estonia is very strongly integrated into the free and progressive world and that we are increasingly contributing to solving global problems gives us strength and confidence.