PIMCO just published a macro investment outlook which considers three potential outcomes in the Russia-Ukraine war:
Q: How is the Russia-Ukraine conflict likely to play out over the next five years?
A: It is difficult to foresee how the Russia-Ukraine conflict will be resolved, or even if it will be resolved, over the secular horizon. There are three scenarios to consider. The first scenario would be a decisive win on the battlefield by Russia or Ukraine that ends fighting, but we see little probability of such an outcome. The second scenario is a negotiated ceasefire or withdrawal of forces with a settlement on agreed borders, and that is about a 30% probability. The most likely case is a frozen conflict with Russian forces still present in the East and parts of Crimea and sporadic fighting, but with little change in the line of control. That’s a 50% or greater probability.
The risk of nuclear escalation by Russian President Vladimir Putin is low, in our view, since his allies have raised objections and highlighted the costs to Russia of such a drastic strategy. It is still possible in theory, however, if Russia loses enough territory that Putin has nothing to show for the invasion, which could be a regime-threatening situation for him. But then, would the Russian military actually execute on a nuclear threat?
This invasion has set back Russia’s military significantly, and it will likely take decades to rebuild. Yet, Russia likely can hold the Ukrainian population and critical infrastructure at risk indefinitely with missile and drone strikes, and can keep, or try to keep, Ukraine from recovering and returning to normalcy. Meanwhile, Ukraine is seeking to join the North Atlantic Treaty Organization (NATO), and to receive stronger support from the West for better equipment and training. Still, all signs point to a frozen conflict, which is tragic for Ukraine in the long run.
We generally concur with PIMCO's probability assessments for the scenarios, but within a significantly shorter time frame (less than 6 months).
Russia-Ukraine background
In May 2021, we were early to note Russian troops amassing along the Ukraine border. By early December 2021, our open-source analysts had assigned an approximate 80% probability to Russia invading Ukraine within the next 3 months, which later increased to above 90% by early January 2022. From that point onward, it consistently approached 100%.
By early February 2022, we engaged in a vigorous debate about their assessed probabilities (above 90%), appearing to dismiss all diplomatic efforts in favor of evaluating troop movements on the ground.
We're reasonably confident international investors have little-to-no edge over others with regards to this story. The same applies on the likelihood of a US recession.
JP Morgan on the global economic outlook by region
Here's a useful robust internal debate between the top economists at JP Morgan on the outlook for the global economy (highly recommended). Some things are difficult to capture in research reports.
We also like to challenge the robustness of status quo assumptions.
