By Gareth Gettinby

Russia’s invasion of Ukraine has created immediate risks for the markets that are also destined to have an impact over the longer term.

For the global economy, the most important near-term implications of the war are higher energy and food prices and further disruption

to supply chains. The result is a continuing surge in inflation in many regions, which will prove to be far from “transitory” in nature.

The Ukraine war is a game-changing event in so many ways. In Europe, it presents significant challenges, given the region is one of the world’s largest energy importers and relies on around

40 per cent of its gas and 20% of its oil coming from Russia. If that gas supply is turned off, Europe is vulnerable to further economic disruption.

There is an obvious need for Europe to source its energy needs from other countries, such as Norway. But it also means we should expect to see a further acceleration in the renewable energy transition – all of which will take time and require a significant fiscal infrastructure spend.

In the meantime, inflation remains the focus for central banks, which means market participants are spending a significant amount of their time trying to anticipate how these banks will act to combat rising prices. For many countries inflation continues to increase and is having a real impact on the cost of living.

Sadly, the full force of inflationary pressure has not yet been felt on economies.

We can rightly say the continued rise in inflation has been exacerbated by the war and pandemic-driven supply-demand imbalances.

It is important to recognise, however, that the inflation problem predates both of these events

− to an extent − due to fiscal and monetary extremes (think prolonged low interest rates

and quantitative easing).

As ever, attention is drawn to America as perhaps the front runner in moving markets forward. On this occasion, though, the US Federal Reserve is in a completely different situation to many other central banks.

The US labour market is historically tight, and growth remains above long-term averages. The US Fed has eventually started increasing interest rates, starting earlier this year with 0.25% (for the first time since 2018). This has been followed up in the most recent Fed meeting with a further 0.5% in May. It has also announced the start of the “great quantitative tightening” (reducing assets by selling bonds or letting them mature without replacement) beginning next month,

as they reduce the $9 trillion balance sheet, by $47.5 billion per month for three months then reaching $95bn in September.

There is no exact playbook for the Fed as it attempts to manage growth and rein in price rises. The Fed’s previous hesitancy to increase rates means it is significantly off the pace in controlling inflation and should have been raising rates at least 12 months ago.

While arguably late, the Fed is now putting its foot on the brake to derail inflation, as chairman Powell has signalled 0.5% rises for next month and also July. This aggressive increasing is needed but has the potential to push the

US economy into a recession.

As the world moves from pumping money into the economy (quantitative easing) to quantitative tightening it is difficult to maintain a positive outlook on many asset classes. The investment outlook is therefore one of caution, given high levels of uncertainty.

Markets, by their nature, tend to reflect the future economic outlook based on the events of today. That means a lot of the current bad news is already baked into asset prices.

In the meantime, active investors may find opportunities in among the volatility to “buy the dips and sell the rallies” − or favour those companies with a particular focus on providing sustainable dividends.

For long-term investors there are opportunities regardless of the near-term volatility.

An exit from Russian oil and gas is inevitable, which means the energy transition will be accelerated further. Companies that are directly involved in this transition will be the long-term winners.

Gareth Gettinby is an investment manager,

multi-asset and solutions, at Aegon Asset Management.