The Impact of the Russia-Ukraine Conflict on Economies and Markets

[Goldman Sachs]( [BRIEFINGS] February 25, 2022 Top of Mind: Russia Risk What are the potential geopolitical, economic and asset implications of the conflict unfolding between Russia and the West over Ukraine? Goldman Sachs Research's Allison Nathan, senior strategist, explores the topic[in her latest Top of Mind]( interviews with notable Russia watchers who interpret the lead-up to recent events very differently. At this point, Russia may not relent until it has secured a large swath of Ukrainian territory, says former U.S. senior intelligence officer Andrea Kendall-Taylor, while Dmitri Trenin, Director of the Moscow Center of the Carnegie Endowment, envisions a more permanent rupture between Russia and the West. Meanwhile, Michael Mandelbaum, Professor at Johns Hopkins SAIS, makes the case that NATO expansion, which he characterizes as one of the greatest blunders in the history of American foreign policy, played an important role in laying the groundwork for the current conflict by helping to create a reflexively anti-Western mindset in Russia. So where does the conflict go from here? Nathan turns to sanctions policy expert Eddie Fishman and GS analysts to understand why and how sanctions — and their economic and market impacts — will differ from the 2014 conflict. One thing is clear: a tighter backdrop for commodities leaves them more vulnerable to even small disruptions and the de-globalization trend that these geopolitical risks reflect could reinforce the other major global concern today— inflationary pressures. [Read report]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=Top%20of%20Mind&body=www.gs.com) What the Fed’s Hawkish Pivot Means for Economic Growth and Markets Above (L to R): David Mericle and Brian Friedman of Goldman Sachs Global economies are on the cusp of one of the largest monetary tightening cycles in recent history as the Federal Reserve, European Central Bank and the Bank of England all look to reduce the level of support for the economy. In the latest Exchanges at Goldman Sachs, host Allison Nathan, a senior strategist in Goldman Sachs Research, discusses the implications of the Fed’s hawkish pivot for markets and investors with GS Research’s David Mericle, chief U.S. economist, and Brian Friedman, global head of Market Strats for the Global Markets Division. How high can the Fed go? Goldman Sachs Research [recently raised its estimate]( for the number of expected Federal Reserve interest rate hikes to seven due to “worrisome” wage growth dynamics and “strong and broader inflation trends,” Mericle explains. But the Fed could surprise the market by doing more given the lack of significant tightening in financial conditions, he says, because tightening of GS Research’s Financial Conditions Index has remained fairly limited. “What that means is that the impulse to the real economy is also not particularly large so far,” Mericle explains. That said, current events reduce the odds of a 50bp hike in March. Fiscal tightening is likely a bigger risk to growth than monetary tightening. “If the Fed thinks it's overdoing it, I could see them slowing the pace to once per quarter or backing off entirely if it looked like serious downside risks to the economy were emerging,” Mericle says. “Whereas I don't think we're going to get a sudden round of massive fiscal support if it looks like the pullback in fiscal support has overdone it and threatens to push the economy to a very weak place.” Credit is vulnerable as financial conditions tighten. Betting against Treasuries is a “high-quality trade…[and of] all of the assets that are maybe most vulnerable within a financial condition tightening, it's credit,” Friedman says. Meanwhile, “in a world where nominal growth is still good and rates are still relatively low, that's still kind of a tailwind for equities, and corporates are in very strong shape with respect to both earnings, growth and margins. So we much prefer the combination of being long equities hedged with short credit.” [Listen to podcast]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=What%20the%20Fed%E2%80%99s%20Hawkish%20Pivot%20Means%20for%20Economic%20Growth%20and%20Markets&body=https%3A%2F%2Fyoutu.be%2FoXrt7QHcy1Y) Liquidity is Drying Up in Equity Markets Liquidity in the equity market is poor. Only a few times in recent history, based on order book data on S&P E-mini futures as a proxy, has it been this difficult to trade a chunk of equity exposure: October 2008, during the financial crisis; December 2018, amid growth and monetary policy concerns; and March 2020, at the onset of the COVID-19 pandemic. In each of those episodes, the S&P 500 Index of stocks fell more than 20% — substantially more than the sell-off last month, says Lee Coppersmith, a vice president in derivatives sales in the Global Markets Division at Goldman Sachs. Liquidity is fragile for several reasons. Equity markets have been fragmented for years because of regulation, according to a Goldman Sachs Research [Top of Mind report](. The report suggested that automated market-makers can be credited with improving liquidity during normal times, but they may pull back when confronted with unusual or unexpected conditions. And while liquidity may be showing some signs of improving, other headwinds are growing: there are concerns that economic growth is slipping, the Fed is preparing to raise interest rates and geopolitical uncertainty is swirling. “Staying cognizant of liquidity conditions is paramount,” Coppersmith says. [Learn more]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=Liquidity%20is%20Drying%20Up%20in%20Equity%20Markets&body=https%3A%2F%2Fmarquee.gs.com%2Fwelcome%2Fproducts%2Fresearch-insights%2Fmarket-insights) Briefly…on How to Equalize Opportunities for Black Women Business Owners In [Black Womenomics: Equalizing Entrepreneurship]( new research from Goldman Sachs delves into the entrepreneurial and economic inequalities facing Black women in the U.S. From access to capital and financial education, to the effects of discrimination and bias, the research paints a daunting picture of the challenges facing Black entrepreneurs. We sat down with Gizelle George-Joseph, global chief operating officer for Goldman Sachs Research and author of this research, to take a closer look. Gizelle, what was your key takeaway from Black Womenomics: Equalizing Entrepreneurship? Gizelle George-Joseph: The headline is that Black women own less; they make up roughly 6% of the U.S. population but own just 2% of employer businesses. The imbalance is particularly stark for single Black women, just 0.5% of whom own a business — a rate that is 24-times lower than for single white men. This is important because business ownership has a large impact on economic progress. Credit market challenges, low levels of wealth and liquidity constraints all create substantial barriers to entry for Black entrepreneurs. Financial knowledge gaps and structural discrimination compound these issues and impact opportunities for Black women. What is the impact of unequal access to capital for Black-owned businesses? Gizelle George-Joseph: The data shows that Black entrepreneurs are 20% less likely to fund their startups with bank business loans; instead they are more likely to rely on more expensive personal credit card debt and personal and family savings. Likely because they’re undercapitalized, Black businesses are overrepresented in sectors with low capital intensity, such as health care and social assistance, and underrepresented in sectors with high capital intensity like real estate and construction. Undercapitalization also impacts profitability and this is corroborated by Black business owners who report — at three times the rate of white entrepreneurs — that access to financial capital and the cost of financial capital negatively impact the profitability of their businesses. On top of that, persistent structural, social and economic inequality have caused Black entrepreneurs to become disillusioned, and this impacts their entrepreneurial behavior. For example, many Black business owners won’t even apply for financing because they think their requests are going to be denied. So access to capital impacts a lot — business growth, profitability and overall business sustainability. How important is financial education in equalizing opportunities for Black women? Gizelle George-Joseph: Financial education is a cornerstone of financial wellness and consequently, of economic growth. One academic study estimates that financial knowledge accounts for more than 30% of retirement wealth inequality. Yet Black Americans, and especially Black women, lag white Americans on financial knowledge. Financial information gaps contribute to expensive borrowing and frictions on the investment side. The data shows that familiarizing Black women with investment risks and risk tolerance would increase the likelihood of owning high-return assets. And overall, higher levels of financial education would lead to better financial wellness. To what extent do discrimination and bias play a role in limiting the success of Black women? Gizelle George-Joseph: The subject of race and prejudice remains a complex and controversial one to navigate, but multiple studies document that high levels of discrimination persist in the labor and credit markets and really impact the opportunities of Black Americans. One remarkable study presented Black and white mystery shoppers as customers seeking credit from traditional banks. The takeaways from this field experiment were striking. First, Black businesses are scrutinized at a much higher level than white-owned businesses. Second, Black business owners are prodded for more personal information than white business owners. In the field experiment, while both Black and white testers were asked about their marital status by loan officers, which is a violation of the fair lending law, Black American testers were asked almost six times more often. And finally, Black business owners receive less customer service help. This is just one example, but it underlines that structural discrimination remains a material factor in the disadvantage faced by Black Americans in the credit markets. What actions can be taken to address entrepreneurial and economic inequality experienced by Black women? Gizelle George-Joseph: Closing the gaps requires a commitment across the public and private sectors, and the potential solutions we outline in the research are by no means exhaustive. To help close the capital access and investment gaps for Black entrepreneurs, policymakers could enforce fair lending laws to address discrimination in the credit market and expand access to capital for Black women. For the private sector, providing access to capital for Black women entrepreneurs is also at the top of the list. Easier access to capital would reduce dependence on more expensive forms of credit and the use of personal savings, factors that often inhibit the success of Black women-owned businesses. This would likely increase the number of Black women entrepreneurs, support existing small businesses and grow long-term wealth. When you combine that with mentoring, coaching and providing Black women entrepreneurs with educational frameworks that will expand their financial capabilities, this would really help set a solid foundation for sustained economic mobility. Finally, can you expand on how this research builds on your report, Black Womenomics, launched last year? What do you see as the ultimate impact of this research? Gizelle George-Joseph: [Black Womenomics: Investing in the Underinvested]( was our assessment of the 90% wealth gap of Black women and its relationship with the broader economic and social disadvantages Black women face in the U.S. We looked at the earnings gap, the education gap, capital access and its impact on home and business ownership, as well as the role that inheritances and gifts play in perpetuating the wealth gap through generations. And importantly, we also looked at the health gap, as Black women experience significantly less favorable health outcomes. So we really tackled a broad range of issues in our foundational study. In Equalizing Entrepreneurship, we deep dive specifically into business ownership — which is a really important component of wealth. We look at the challenges that Black women have starting and sustaining a business and the impact of accessing capital and financial education in, well, equalizing entrepreneurship. And research and advocacy are so critical in this journey toward racial economic equality. Being able to use our platform as Goldman Sachs Research to elevate awareness and to offer actions to help mobilize change is pretty powerful. We have a long history of writing on the topic of inclusive growth, which started with Womenomics in 1999. The idea behind the research is that investing in women is not just a fair thing to do, but it’s good for business and good for the economy. As a Black woman, I am really proud that we have turned the lens of that research on racial economic inequality, as well. [Read more Briefly Q&As]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=Briefly%E2%80%A6on%20How%20to%20Equalize%20Opportunities%20for%20Black%20Women%20Business%20Owners&body=https%3A%2F%2Fwww.goldmansachs.com%2Finsights%2Fpages%2Fblack-womenomics-equalizing-entrepreneurship.html) Goldman Sachs Media Highlights CNBC - February 23 [Goldman Sachs CEO David Solomon: We’re Focused on Clients, and Our Strategy Is Working]( (4:33) CNBC - February 21 [Hydrogen Market to Grow 200-Fold in Next Decade, Predicts Goldman Sachs]( (4:02) Bloomberg - February 18 [Goldman Sachs Says Pullback Won’t Turn Into Bear Market]( (3:48) [Subscribe]( [Unsubscribe]( The data provided in this newsletter is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. 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