After holding rates near zero for the past 2 years, the US Federal Reserve (Fed) had commenced their first interest rate hike in March with 6 more to come this year, and possibly another 4 hikes next year. The aggressive hikes came after inflation reared its ugly head by clocking a 7.9% rise year-on-year in February, with the on-going war between Russia and Ukraine puffing up inflation even more as the war lengthens.

Why is the war causing prices to rise?

“Russia and Ukraine play a crucial role in supplying food. Together, they account for about a quarter of all wheat and barley shipments, a fifth of corn and the bulk of sunflower oil1.”

Other strategic commodities are also impacted by the Russia-Ukraine crisis, in addition to crude oil, natural gas, and wheat markets; especially coal and nickel.


Russia is the world’s third largest exporter of coal that is used heavily in power generation and energy intensive manufacturing; and Russia is also the world’s largest exporter of nickel, which is an essential to battery technologies.

As the war prolongs, inflation will likely stay high till the end of the year or early next year.

Correspondingly, the Fed will also act by increasing interest rates to an expected 1.75% this year, and possibly to an eventual 2.75% next year, which is a quantum leap from near zero rates, which might push the fragile economy into a recession.

Is a recession imminent?

Our macroeconomic indicators are already flashing amber, signalling a possible recession. Firstly, the yield curve is inverting. 

Historically, recessions follow within one year of the yield curve inversion (when the blue line above meets zero percent), except for one instance in the 1960s. The shaded areas indicated the US recessions.

What causes the inversion? Campbell Harvey, the finance professor who developed this indicator, explained that as the US 10-year Treasury bond is considered a safe asset, and “when people believe there is increased risk of a crisis or a recession, they shift their assets into this bond. This is sometimes known as a ‘flight to quality’. Buying pressure on the 10-year drives prices up, thereby lowering yields. The long-term yield can be lowered to such an extent that it ends up below the short-term yield – an inverted yield curve. So think of the yield curve as an indicator of sentiment about the future of the economy and the risks we face. Yield curves are 90 percent of the time ‘normal’ (meaning longer-term rates exceed short-term rates). However, on those occasions when they are inverted, it is almost always bad news2.”

Secondly, the OECD Composite Leading Indicator (CLI, see below) is trending down.

The CLI is “designed to provide early signals of turning points in business cycles showing fluctuation of the economic activity around its long term potential level3.” So, even though there were occurrences where the CLI had turned down and not yielded a recession, it was also telling of the economic conditions to come. The shaded areas below also show the recessions.

We think there are two likely scenarios:

  1. As the US Fed frontloads monetary tightening for the first “half” of the year, Fed will stop increasing interest rates as inflation is worn down in the second “half”.
  2. The rate hikes pushing the economy into a recession.

How should we position the portfolio then?

A recession would be demarcated as ‘Winter’ in terms of our portfolio allocation, and we could use bonds as a deflationary hedge. It is a myth to believe that returns can only be achieved during “good times” such as ‘Spring’ or ‘Summer’. Even though many plants bloom in spring, many also thrive in the cold, for example, the evergreens like pine trees.

The amber of our indicators also tells us that it’s currently Autumn.

In our portfolio positioning, we look a few steps ahead of the current situation to hedge risks and capture opportunities for you. As such, we believe our portfolio will remain resilient regardless of the external environment. Having a proper asset allocation will allow us to hedge against inflationary risks, deflationary risks and black swan events as other asset classes such as gold and bonds can perform when equities do not.

We’d be arranging for a live session with Q&A in April to share more on translating a possible Winter into a great opportunity for all of us – do register and we’d see you there!





2.Duke University

3.Organisation for Economic Co-operation and Development, OECD

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