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High energy prices will last for months

Franklin Templeton believes Russia’s invasion of Ukraine will have a long-term impact on European economies.
Pipeline in industrial district

The investment implications of Russia’s invasion of Ukraine in the short-term are volatile markets, Kim Catechis, investment strategist at Franklin Templeton Investment Institute, told a webinar this week.

The Cboe Volatility Index (VIX) is currently at about 34.6, and its average in 2021 was 19.7, he noted. “Clearly, we’re going to have a lot of volatility ahead. I believe that oil and gas prices are going to trade in a relatively high range, probably for the next six-to-nine months.”

Inflationary effect

Gas prices in Europe will remain particularly high, as European countries have been importing large amounts of gas from Russia, and the inventories among European countries are low. As a result, they will have to restock in preparation for next winter and they will have to buy in the spot market, he explained.

The higher gas price will hurt European countries’ GDP, according to Catechis, “and at the moment, I think economists around the world are still figuring out exactly how much that could be.” The consensus appears to be around a hit of -0.3% to -0.5% on GDP growth. 

The negative impact on European economies is not even larger, because the timing of the war comes after two years of Covid 19 pandemic, and in Europe, most governments have been active in supplying support to citizens. As a result of the financial support there are relatively high savings rate in large sections of society, Catechis said.

“So, the savings that they have at hand are probably higher than there would have been at the same time in 2019. And this is going to help them get through this inflationary pressure.”

Yet, Inflation is a major issue for investors this year, said Catechis, and hence “economic growth globally is going to be challenged”.

Central banks are in a particularly tight spot right now. The schedule that has been anticipated, in terms of the pace of rate rises is going to be slower, “as the wrong thing to do would be to start hammering an economy that’s already suffering because of energy prices climbing”. 

Sanctions impact

In the longer term, Catechis believes that the severe sanctions could disconnect the West from Russia.

“Some people are recalling what happened when Crimea was invaded, and the stock market famously recovered six months later. This is different. What we’re seeing is a realignment of geopolitical expectations across Europe.”

The sanctions on Russia this time have come in quicker, tougher and are much more concerted in their delivery, Catechis said.

On the other hand, China is likely to expand its trading with Russia in the future. It is likely that China would buy more gas from Russia, as presumably, Europe is going to stop buying at some point, he said. 

However, Moscow would have to accept that China will not pay European prices, as it will in effect be able to pay distressed prices because it knows that no other country can take the volume so easily, Catechis concluded.

Part of the Mark Allen Group.