Why will the uncertainty in markets continue for a long time?

There are strong arguments that uncertainty has been the defining economic feature of the past three years. From the US-China trade war to COVID-19 and the supply chain crisis of 2021, markets have been constantly up or down with remarkably few (and generally short) periods of stability in between.

2022 has only continued that trend so far. As the New York Times reports, stock markets have experienced several wild swings this year alone, with the S&P registering record losses (including its longest losing streak since 2011) amidst intermittent rallies.

Likewise, global events such as the Russia-Ukraine war, rising inflation, and enduring COVID tailwinds are contributing to this uncertain state of affairs.

Consequently, market participants and stakeholders are reacting with increased caution. CNBC, citing an Allianz Life survey, reports that 43% of investors say they’re “too nervous” to invest within this market, especially considering the lack of clarity as to what comes next. Stakeholders and participants may have to wait longer for clarity though, because, as I argue below, the unsure state of the market is only likely to continue. Here are the top reasons why.

Seref Dogan Erbek

Slowing global economic recovery

Mid-2021 produced higher than expected global growth figures, fueling an optimistic outlook for a global economic rebound. The pace of that growth slowed down before year-end though, due to chronic supply shortages and a resurgence of new COVID variants omicron and alpha.

This year has not brought any improvement in the situation. As the World Bank reports, global economies continue to experience decelerating growth due to the exhaustion of pent-up demand and unwinding fiscal support. Likewise, a sharp incline in global inflation rates has impacted consumer spending as greater income shares go to necessaries and less allocation to savings and investment.

Tightening monetary policy

I’ve mentioned tightening fiscal policy above, but it’s worth a closer inspection. Central banks in Europe, Japan, and the US intimated earlier in the year that they would be exploring a tighter monetary policy in a bid to combat rising inflation. Consequently, we’ve seen the Federal Reserve raise rates recently and the European Central Bank has given a clear signal on rate hikes in July.

As the New York Times reports, investors and industry are reacting to the news with caution as they consider the potential implications of these rate hikes and how they are likely to play out. Consequently, I expect decelerated borrowing activity while the industry gauges incoming measures.

Russia-Ukraine conflict

War is generally bad for stability, but in the case of the Russia-Ukraine war there are more reasons why this is the case. Russia is a major player in the global energy market, but its energy obligations to trade partners and general global supply are more susceptible to shocks due to the specter of war.

Global supply runs the risk of damage to critical Russian transmission infrastructure, such as the key pipelines running through Ukraine and other supply channels. Damage to these pieces of infrastructure may further congest an already inflated market, resulting in even higher prices and less of the product.

It’s unclear how long the conflict will last. Consequently, the energy sector will likely continue to experience elevated prices and uncertain supply.

COVID-19 tailwinds

Another important factor, which is largely being ignored for the moment, is the continuing effect of the pandemic on global trade. Enduring concerns over COVID variants, new and large-scale outbreaks in China, and attendant supply chain congestion are all contributing to a highly uncertain market state.

Considering that vaccine hesitancy is still wide-spread and vaccine penetration levels continue in the low figures (particularly in emerging economies), we’re likely some way off complete clarity in this area as well.

European countries adopt the first support measures for companies harmed by the Russia-Ukraine conflict

For companies still reeling from pandemic tailwinds and last year’s supply chain shocks, the Russia-Ukraine conflict couldn’t have come at a worse time.

While most organizations were focused on consolidating growth gained within the past year, new concerns raised by the war have forced boardrooms back into crisis mode as they grapple with rising energy and supply costs.

Likewise, further constrictions resulting from sanctions on Russian entities and individuals have impacted certain businesses, forcing them to either abandon or suspend ventures with Russian-linked partners.

As a remedial policy, the EU recently adopted new support measures to aid businesses that have been put at risk by the conflict and attendant sanctions meted on Russia. The measures, which went into effect on 23 March 2022, will provide financial aid up to €400,000 for some affected businesses and state guarantees on bank loans to qualifying companies.

Seref Dogan Erbek

Support measures for war-impacted companies

According to Margrethe Vestager, European Commission VP of competition policy, the state aid measures are adapted under a Temporary Crisis Framework (TCF) that aims to mitigate the impact of the war and existing sanctions while retaining competition in the Single Market.

Three types of aid are available under the TCF:

  • Financial aid: Member states are allowed to establish schemes under which impacted companies in agriculture, fisheries, and aquaculture can receive an up to €35,000 grant. Companies in other sectors may receive up to €400,000, and in both cases, states may provide the grant in any form, including direct money transfers. Notably, the aid provided here is not linked to specific costs or liquidity issues.
  • Liquidity support: The TCF provides liquidity support in two categories. The first category includes state guarantees in subsidized premiums to support existing loans owed by affected companies. The second category offers subsidized rate public and private loans. In both cases, maximum loan limits will apply depending on each qualifying company’s operational needs, energy costs, turnover, and liquidity needs.
  • Energy assistance: Perhaps the most immediate impact of the Russia-Ukraine war is the current energy squeeze being experienced by individuals and businesses. The EU is a major energy trade partner with Russia, but that trade has mainly been suspended due to current diplomatic strains. These events hurt many companies, but the EU is providing some stimulus to subsidize rising energy costs. There are also caps to this aid, though. Companies can only receive 30% of eligible expenses, up to €2 million. If operating losses ensue, companies may receive additional assistance above the €2 million cap – up to €25 million for energy-intensive companies and a ceiling of €50 million for firms in specific industries, including aluminum, glass fibers, and basic chemicals.

Conditions attached to aid and duration

These measures carry additional conditions that states must apply regarding qualifying companies. The EC calls these “safeguards” designed to protect economically-viable businesses, ensure that aid reaches companies in need, and foster the long-term sustainability goals of the EU.

Accordingly, states should establish a link between the impact on affected companies, the scale of their economic activity, and the amount of aid they can collect. They might take each company’s turnover and energy expenses into account in this determination. Likewise, aid to energy-intensive companies is envisaged to mean companies whose energy expenses constitute at least 3% of production value.

Lastly, states are encouraged to consider tying aid to sustainability goals for the affected business, but in a non-discriminatory manner.

The TCF is slated to expire on 31 December 2022. Although, before expiry, the EC will convene to determine if there is a need to extend the framework.