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Investment strategy

March 27, 2022

3 mins

Three possible scenarios for the global economy and markets

March 27, 2022

3 mins

David Bailin

Chief Investment Officer and Head of Citi Global Wealth Investments

Steven Wieting

Chief Investment Strategist and Chief Economist

SUMMARY

The global economy is going through an uncertain patch given the upheaval caused by COVID and the ongoing Russia-Ukraine conflict. Considering that, we envisage three possible scenarios, blending economic, political and central bank information and future actions.

ROBUST, RESILIENT, RECESSION – these are the Three Scenarios we have devised to forecast possible outcomes as the world faces an exceedingly complex set of challenges. The war has created a new supply shock. The US Federal Reserve is looking to attack inflation even as growth is slowing and the distortions of the pandemic have extended longer than expected.

By presenting our Three Scenarios, we have highlighted the economic and political inputs that have the potential to impact the global economy and markets. At this moment in time, the base case RESILIENT is a 40% probability, with each of ROBUST and RECESSION at 25% probabilities.

Markets are leaning toward the ROBUST outcome at present. Therefore, in our view, acting proactively to seek to build strong and resilient portfolios now is prudent. Allocations to the right equity sectors, adding equity positions that may hedge tail risks in natural resources, and leaning heavily toward quality, dividend-paying companies are all strategies in which diversified portfolios are able to power through this unusual period in world history.

Our RESILIENT scenario expects Fed tightening policy will constrain growth in the US and world economy this year. This will be neutralized to some degree by growth generated from lean inventories and recovering production. In this scenario, strong corporate profits will shift to sectors with durable demand – companies selling goods and services that are must-haves for consumers, rather than just nice to have.

The ROBUST scenario assumes there is greater risk in Europe's markets than in the US, and that the conflict in Ukraine and Russian economic sanctions do not expand further. A compromise between Ukraine, Russia, and NATO would bring commodity prices down, and might diminish the Fed's urgency to tighten policy.

In our RECESSION scenario, the Fed would tighten too fast for growth in supply to meet decelerating demand, resulting in recession in 2023, with a sharp drop in US share prices. The forecasted path for US Treasury 2-year notes – coupled with expectations of reduced Fed lending – suggests a growing recession risk in 2023.

While we believe these three to be the most likely outcomes, we note that upside and downside scenarios are also possible, and there is no assurance that any scenario will be achieved.