Impact of Russia-Ukraine conflict ripples across real assets

Impact of Russia-Ukraine conflict ripples across real assets

10 minute read

March 2022


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The Russia-Ukraine conflict has put additional upward pressure on inflation, increasing the likelihood that economic growth will slow and that stagflation— historically a strong environment for real assets—may emerge.



  • The commodity supply shock resulting from the war has driven inflation higher, increasing the chances that global growth will slow.
  • The conflict has impacted commodity markets and may have implications for other real assets categories, particularly global real estate.
  • Slower growth and higher inflation raise the prospect of stagflation, which historically has been a strong environment for real assets.

The commodity supply shock has driven inflation higher

The notion that the pronounced upswing in inflation in recent months would be transitory has fallen by the wayside with Russia’s invasion of Ukraine.

Global headline consumer inflation prior to the war was at 7.2% year-over-year, up from less than 2% during the Covid recession and roughly 2% over the last cycle (Exhibit 1). Supply disruptions stemming from the conflict have placed additional upside pressure on commodity prices, which were already at multi- decade highs due to reopening demand and supply chain issues. Coupled with wages increasing faster than productivity and housing costs outpacing the broader cost of living, this environment has provided conditions for sustained inflation above the last cycle’s trend.

The inflation backdrop and the specter of slowing growth have made navigating near-term monetary policy increasingly challenging for central banks. Typically, slower growth would keep central banks from raising interest rates. But the market has been surprisingly willing to price in an aggressive path of expected rate hikes at a time when geopolitical risk is high and growth is expected to slow sharply from the 7% GDP registered in the U.S. in the fourth quarter.

Global inflation on the rise

OECD consumer prices (yr/yr % change)

Global inflation on the rise

Indeed, the Federal Reserve raised its benchmark interest rate by 25 basis points on March 16 and indicated it would likely raise it six more times this year. On March 17, the Bank of England raised rates for the second time this year, and indicated five more hikes. The European Central Bank is likely to follow suit, although at a somewhat slower pace than the U.S. and U.K., given Europe’s exposure to the crisis.

The impact of the conflict may spread beyond commodities

The commodity supply shock from Russia’s invasion of Ukraine has raised concerns over the pace of global growth in 2022. Continental Europe is particularly exposed, as those countries are more reliant than the U.S. or the U.K. on Russia-Ukraine commodities.

Economic sanctions imposed on Russia have isolated the country to some extent, but they may also lead to energy supply disruptions or other supply chain constraints. The conflict has near- and long-term implications for the global economy and may ripple across real assets categories other than commodities, such as real estate.

For example, over the near term, consumers might spend less disposable income because of higher costs, potentially impacting the retail sector. Further deglobalization and investments toward lower energy dependency could lead to structurally higher inflation. Longer term, migration trends could result in incremental housing demand in certain markets (Exhibit 2).

Potential impact of Russia-Ukraine conflict on economies, real estate
Potential impact of Russia-Ukraine conflict on economie real estate

Slower growth + higher inflation = stagflation

Slackening economic growth combined with persistent, elevated inflation has raised the chances that stagflation could emerge. We define stagflation as slower GDP growth and higher inflation rates vs. the 12-months-prior consensus expectations.

While growth in major developed market economies has not declined, estimates are coming down as the impact of the Russia-Ukraine conflict becomes clearer. Forecasts for above-trend growth this year have morphed into calls for a “soft landing.” For listed real estate investors, we believe reflation or stagflation should not be cause for concern, as real estate has historically outperformed stocks and bonds in both environments.

Although real estate has underperformed its historical average real return in periods of stagflation by –1.1% since 1991, the category has nevertheless produced an average annualized real return of 6.9%. In contrast, over that same timeframe, the broad global equity market has trailed its long-term inflation-adjusted average by –5.4% under stagflationary conditions, with a modest average annual real return of 1.7%. Other real assets categories have historically performed significantly better in stagflationary periods, in both realized and relative terms (Exhibit 3).

Real assets historically perform well in a stagflationary environment

Relative real return by category vs. long-term average (1978–2021)

Relative real return by category vs. long-term average 1978_2021

Implications for real assets and alternative income

Implications for real assets and alternative income


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