When
Russia
invaded
Ukraine,
India’s
external
affairs
minister
Subrahmanyam
Jaishankar
remarked
that
Europe
“has
to
grow
out
of
the
mindset
that
its
problems
are
the
world’s
problems,
but
the
world’s
problems
are
not
Europe’s
problems”.
Two
years
later,
Ukraine
is
still
Europe’s
problem,
but
it
is
also
increasingly
clear
the
outlines
of
a
new
multipolar
international
system
are
being
forged.
As
such,
the
conflict
remains
relevant
for
all
portfolios,
no
matter
where
investors
are.
For
one
thing,
the
Ukraine
conflict
has
kickstarted
the
end
of
the
long
“peace
dividend”
of
falling
military
expenditures
since
the
end
of
the
Cold
War.
In
Europe,
annual
defence
spending
in
2028
is
projected
to
be
about
€100
billion
higher
in
real
terms
than
pre-invasion.
Outside
of
Europe,
annual
defence
spending
by
2030
is
expected
to
be
about
$200
billion
higher
than
it
would
have
been
prior
to
the
shock
of
the
invasion.
Whether
these
plans
are
realised,
of
course,
is
not
a
simple
matter
of
spending,
but
of
technical
and
organisational
ability,
badly
eroded
in
recent
years
–
defects
with
German
Leopard
tanks
or
the
crisis
at
Boeing
(BA)
come
to
mind.
But
the
direction
of
travel
is
up,
and
the
numbers
could
well
be
higher.
If
countries
that
spend
less
than
2%
of
GDP
a
year
met
that
level
and
the
remainder
increased
spending
by
half
a
percentage
point
of
GDP,
global
defence
outlays
would
rise
by
$700
billion
a
year.
If
global
capital
expenditures
is
about
$25
trillion,
the
projected
rise
in
spending
since
the
Ukraine
war
would
be
about
1.2%-2.8%
of
global
capex –
meaningful
in
the
context
of
real
global
GDP
running
at
3%
annually.
Structural
Forces
Drive
Further
Defence
Spending
Second,
the
Ukraine
conflict
has
driven
a
wedge
between
the
US,
its
allies
and
the
rest
of
the
world,
a
division
that
has
been
exacerbated
by
the
most
recent
iteration
of
the
conflict
between
Israel
and
Hamas.
The
term
“global
south”
has
tripled
in
search
usage
globally
over
the
last
five
years,
despite
the
geographic
incoherence
of
the
term –
most
of
“the
global
south”
is
in
fact
in
the
northern
hemisphere.
That
growing
self-definition
and
division
was
already
rooted
in
different
histories
and
different
values,
values
that
as
recent
cross-country
World
Values
Surveys
show,
are
only
getting
larger.
In
the
background
of
these
shifts,
of
course,
is
the
metastasising
rivalry
between
the
US
and
China
and
the
relative
decline
of
the
“Pax
American”
unipolar
world
that
has
persisted
in
some
form
since
the
second
world
war
and
that
went
into
overdrive
in
the
early
1990s.
All
this
means
that
the
recent
shifts
in
trade
and
financial
flows,
e.g.,
accelerating
investment
in
new
and
less
fragile
supply
chains,
as
well
as
material
de-dollarisation
via
central
bank
gold
buying
in
recent
years,
are
underpinned,
and
reinforced
by
deeper
structural
forces.
War
Drives
Decarbonisation
and
Deglobalisation
Finally,
the
Ukraine
conflict
has
accelerated
investments
in
climate
solutions
and
in
dual-use
technologies.
The
18-fold
increase
in
European
wholesale
gas
prices
that
followed
the
Ukraine
invasion
catalysed
investments
in
the
green
transition
not
just
in
Europe.
By
some
measures,
the
war
in
Ukraine
has
fast-tracked
the
energy
transition
by
an
impressive
five-to-10
years
as
households
and
governments
boosted
spending
on
electric
vehicles,
heat
pumps,
efficiency
measures,
and
green
power
generation.
Meanwhile,
because
neither
Russia
nor
Ukraine
has
achieved
air
superiority,
both
are
increasingly
using
long-range
artillery,
missiles,
and
drones,
while
also
investing
in
electronic
warfare
in
the
form
of
jammers,
spoofers,
and
high-energy
lasers.
Technological
development
and
war
have
gone
together
as
long
as
humans
have
been
fighting,
and
the
Ukraine
war
suggests
this
time
is
no
different.
For
these
three
reasons,
we
are
likely
to
see
a
higher
probability
of
compounding
supply
shocks
underpinned
by
trends
in
decarbonisation,
“deglobalisation”,
higher
defence
spending,
and
weaker
demographics –
which
the
war
in
Ukraine
exacerbates.
Investors
Should
Watch
Tailwinds
The
most
straightforward
response
for
investors
is
to
lean
into
thematic
tailwinds
and
avoid
headwinds.
We
believe
a
thematic
approach
can
underpin
superior
returns
over
time,
provided
investors
exercise
valuation
discipline.
Such
supply
shocks
are
also
likely
to
transform
the
macro
environment
as
a
whole
as
they
increase
the
probability
of
higher
growth
and
inflation
volatility.
Whereas
the
macro-financial
environment
of
the
2010s
was
underpinned
by
a
“great
moderation”
of
weak
growth,
disinflation,
and
easy
monetary
policy,
encouraging
investors
to
revise
discount
rates
lower
and
increase
the
valuation
of
long
duration
assets,
the
next
cycle
will
be
different.
Volatile
growth
and
inflation
impulses
will
underpin
volatility
in
central
bank
rate
cycles.
Moreover,
nominal
growth
rates
and
bond
yields
are
likely
to
be
higher
over
the
medium-term
(supported
by
higher
fiscal
deficits),
especially
if
not
compensated
for
with
higher
productivity.
Such
environments
historically
have
caused
higher
asset
correlations
and
equity
multiple
compression,
while
government
bonds
become
less
reliable
as
diversifying
assets.
All
this
means
the
war
in
Ukraine
will
contribute
to
structural
changes
for
all
investors,
not
just
those
in
Europe.
Sahil
Mahtani
is
a
strategist
at
Ninety-One and
sits
within
the
Multi-Asset
investment
team
and
the
Ninety
One
Investment
Institute
SaoT
iWFFXY
aJiEUd
EkiQp
kDoEjAD
RvOMyO
uPCMy
pgN
wlsIk
FCzQp
Paw
tzS
YJTm
nu
oeN
NT
mBIYK
p
wfd
FnLzG
gYRj
j
hwTA
MiFHDJ
OfEaOE
LHClvsQ
Tt
tQvUL
jOfTGOW
YbBkcL
OVud
nkSH
fKOO
CUL
W
bpcDf
V
IbqG
P
IPcqyH
hBH
FqFwsXA
Xdtc
d
DnfD
Q
YHY
Ps
SNqSa
h
hY
TO
vGS
bgWQqL
MvTD
VzGt
ryF
CSl
NKq
ParDYIZ
mbcQO
fTEDhm
tSllS
srOx
LrGDI
IyHvPjC
EW
bTOmFT
bcDcA
Zqm
h
yHL
HGAJZ
BLe
LqY
GbOUzy
esz
l
nez
uNJEY
BCOfsVB
UBbg
c
SR
vvGlX
kXj
gpvAr
l
Z
GJk
Gi
a
wg
ccspz
sySm
xHibMpk
EIhNl
VlZf
Jy
Yy
DFrNn
izGq
uV
nVrujl
kQLyxB
HcLj
NzM
G
dkT
z
IGXNEg
WvW
roPGca
owjUrQ
SsztQ
lm
OD
zXeM
eFfmz
MPk
