Tuesday morning investors woke up to find Russian stocks down 11% as stock markets across the world were bathed in the red as the rouble plunged. Within just three days, Russia’s MICEX stock index had suffered a loss of some £34bn as a direct result of the Crimean crisis.
News wire headlines are updated every few minutes on troop movement and statements from heads of state have heightened the uncertainty of events as the standoff in the Crimea continues.
Some form of sanction seems likely, but it is uncertain how far the West is willing to go with setting trade embargoes and diplomatic expulsions.
“Russia will not want to pre-empt sanctions, Ukraine doesn’t want to anger its European allies or invite further Russian aggression, and the European Union doesn’t want higher energy costs. In a rational world the gas would stay on until trade sanctions are implemented,” according to Craig Botham, emerging markets economist at Schroders.
Because Russia’s chief exports are oil related, any sanctions are likely drive up energy costs, while Ukraine is a major wheat producer, so investors could expect food prices to be similarly adversely affected, he added.
Chaos or opportunity?
Watching unfolding events, some asset managers are viewing it as an opportunity to bolster holdings.
“We still see Europe as the most attractive equity market over this longer-term view, supported by an improving economic and earnings outlook, and at this point we would see a substantial correction as a potential buying opportunity,” Alan Higgins, chief investment officer at Coutts, commented.
“After a strong performance and strong fund flows into European equities, they may be susceptible to profit taking in the near term. US Treasuries may also be supported in the near term by safe-haven demand. For investors with shorter time horizons, a tactical reduction of exposure to European equities and the euro and/or an increase in exposure to Treasuries may make sense,” he added.
However, others are more cautious.
“Heightened political uncertainty causes volatility in markets with potential falls in all assets, equity, fixed income and FX as risk increases. Potential outflows from funds can put further pressure on Russian and Ukrainian assets,” Michael Levy, lead manager of Baring Russia Fund and investment manager on the EMEA equity team said.
If not quickly resolved, the crisis could have long-term implications for Russia’s relations with the west, Stephanie Flanders, chief market strategist for UK and Europe at JP Morgan Asset Management, warned.
“Investors should be prepared for further volatility, in the region and across emerging market assets. They should also be mindful of potential contagion for some European banks and other companies with significant business interests in Russia and/or Ukraine. With regard to Russian equities, however, it is fair to say that a great deal of bad news is already 'in the price'.
"At current valuations, investors would not have to take a very optimistic view on Russia’s future to see some potential upside in Russian assets once the crisis has abated.”
