Covid-19 fatigue is now a widespread affliction. The pandemic has been a leading weight on our way of life for more than two years, and unsurprisingly people no longer want to talk about it. Most of us wish to get on with our lives as if the coronavirus has been vanquished, even though we know in our hearts that it has not. According to Google Trends, searches for Covid-19 moved since March 2020, in the US and worldwide have dropped (see chart 1).
Covid-19 fatigue took two years to set in, and remained prone to sudden spikes of concern. Over the past 90 days, searches for Ukraine have dwindled in the US (see chart 2), with identical trends observed worldwide.
We have lost interest in the conflict even though the news continues to be dramatic, and shocking, and even as countries across the world face up to the dilemma over how much to help in arming the Ukrainian military resistance and in isolating Russia from normal economic activity.
Why the loss of interest? Another Google Trends chart offers some clues. Veiled threats from Vladimir Putin that he was prepared to retaliate with nuclear weapons, and the Russian attack on the Zaporizhzhia power plant, stoked once unthinkable fears of nuclear conflict. Those fears have since dissipated.
See also: Russia resumes Ukraine grain-export deal in abrupt reversal
Also, the initial perception was that the entire Russian campaign was aimed at capturing Kyiv. With the capital under control, victory in some form would be Moscow’s. As Ukrainian forces repulsed Russian aims to take the city, and Putin’s forces changed their plans and withdrew from positions around it, so concern has dissipated. As seen with chart 3, which shows searches for “Kyiv” and “nuclear” over the last 90 days, concern over nuclear escalation appears to have disappeared.
If Russia is not going to knock out the Ukrainian government altogether, and particularly if we can escape without nuclear war, then it appears we think we can safely avert our eyes from the conflict. It is a distressing and distasteful topic that most of us would prefer to ignore, if we can.
See also: Russian Odesa missile strike tests Ukraine grain export deal
The pattern of sentiment in the population as a whole is borne out perfectly in the markets. After a very brief spike in concern, the upward surge in bond yields continued unabated, while global stocks are now up more than 2% since the eve of the invasion.
As Marko Papic of Clocktower Group shows in this chart, the number of Ukraine news stories passing through the Bloomberg Terminal has dipped, while investors have continued to sell Treasury bonds despite their traditional role as a geopolitical haven.
The utter insouciance concerning Ukraine news shows up in other asset classes. According to Eric Robertsen of Standard Chartered, the VIX volatility index has returned to its pre-invasion norm, while emerging market stocks, which stand to be most directly affected by the conflict, have recovered almost completely. Everyone knows that you should “buy when there’s blood in the streets”, but it seems dangerous that so many are comfortable that the worst is known and risk assets are ready to recover.
The end game
I think the words of Bill Browder need to be taken very seriously here. He is famous as the founder of Hermitage Capital Management, which pioneered investing in post-Soviet Russia, and was forced out of the country and has become an inveterate opponent of Putin. Interviewed by DealBook of The New York Times, he was asked to predict the end game in Ukraine. These are the conclusions of their dialogue:
Browder: There is no reasonable way for this thing to end. There’s only an unreasonable way. It’s either he ends up taking over Ukraine and then moving his way toward the Baltic countries to challenge us at NATO, or for him to be defeated by Ukraine and then having the Russian people overthrow him because he was the weak guy who couldn’t beat Ukraine.
DealBook: How do you handicap those two options?
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Browder: I think each of those options has a 15% probability.
DealBook: What’s the remaining 70% probability?
Browder: That he and the Ukrainians and all of us are stuck in this low simmer. It’s not going to be at the same level of awfulness that it is right now, but at this low simmering conflict that just goes on and on and on for years.
This summation seems reasonable. There are chances of seriously terrible and genuinely positive outcomes. But the likelihood is that this turns into something more like World War I, stuck in a stalemate for years. The attitude in markets seems to be that this can then be safely ignored, much as the grinding conflict in Afghanistan came to be known as the “Forgotten War”.
The problem with this is that Ukraine is in Europe, bordering the European Union (EU), and is a major supplier of raw materials to the rest of the world. This is not like Afghanistan or the many appalling conflicts in sub-Saharan Africa. They might be as bad, or even worse, in human terms. But as far as the investment world is concerned, they have nothing like the same impact.
Further, it is hard to see how the stalemate can end without the West finding some way to limit its reliance on Russian energy. It will take years, at best. As it stands, energy policy is directly enabling the Russian military campaign. This is particularly clear from the Russian oil price in roubles, says Matt Gertken, geopolitical analyst of BCA Research.
The collapse of the oil price in late 2014 may or may not have been deliberately engineered to make life difficult for Russia, and the current high oil price may or may not have driven Putin’s strategic decisions. But it seems beyond argument that the West needs to find some way to pay much less money to Russia for energy if this conflict is not to drag on and on. Similarly, Russia needs to find alternative buyers to avoid an eventual loss in a years-long war of attrition.
That turns the spotlight to India and particularly to China. If they decide to prop up Russia by buying more oil at preferential rates, Beijing will undercut its economic relationship with the EU and probably usher in a grim return to a bipolar Cold War-like world.
The fulcrum of multi-polarity is not to be found in the bogs and marshes of Ukraine, but in the China-Europe axis. If Beijing continues to side with Russia, it risks creating a bipolar world where two warring camps — the Eurasian Axis (Beijing-Moscow) and the West — do become powerful enough to carve up the planet, leading to the type of a geopolitical forecast that many analysts currently believe is likely: A new Cold War that bifurcates the global economy.
What President Xi Jinping will do in the next several weeks will not only determine China’s economic future, but also the global distribution of power governing international relations, trade and finance over the next decade and quite possibly beyond. We are all already suffering from some degree of Ukraine fatigue. But the temptation to ignore it needs to be resisted. It is way too soon for that.
What difference does it make?
It is worth looking at the lasting impacts the conflict has had to date. The equity research team at Morgan Stanley found that the companies with the greatest exposure to Europe and Russia, in each sector tend to have significantly underperformed their peers since Feb 24. Companies with higher exposure to consumers tended to fare worse. This suggests that equity investors do see the conflict having an impact, but a localised one rather than any broad geopolitical shifts.
Trade flows, for which data tend to come through with more of a lag, are also showing an impact. S&P Global analyses South Korean exports as a good global bellwether and finds, as might be expected, that exports to countries in the old Soviet orbit and to the EU have shrunk over the last 12 months. Exports to Southeast Asia have only partially made up for this, tending to confirm the risk of a bipolar world and one with much less trading activity.
The clearest tell that Ukraine is still exerting a major financial impact comes from the foreign exchange world. In a series of zero-sum games, something has to give. So far, the Aussie dollar — the classic commodity currency — has enjoyed sharply better performance compared to the yen and euro, while the dollar has surged to new highs, which suggests risk aversion and a clear belief that there is some security in commodities.
How can stocks possibly be surviving so well? If we look at prospective earnings multiples for the US and Europe, they have fallen significantly this year. This is a natural consequence of higher bond yields, but it shows that stocks have stayed so resilient almost entirely because the E in the prospective P/E (price-earnings ratio) is still very healthy.
Stocks are resisting the dreadful news from Ukraine because brokers’ analysts are upgrading their forecasts for 2022 earnings despite everything. This week, as the first-quarter earnings season gets under way, will provide new evidence on this. As someone once more or less said, it would be nice if they were right. — Bloomberg Opinion
