The price of a barrel of brent crude nearly broke into the triple digits on Tuesday after Russian president Vladimir Putin took the unexpected step of formally recognising, and deploying troops to, two regions in eastern Ukraine – Donetsk and Luhansk.
The last time brent crude was more than $100 per barrel was 2014.
Putin’s announcement weighed on Asian stock markets, which closed the day down across the board.
After absorbing the news, the Eurostoxx 600 climbed back from a 1.9% morning drop to spend most of the day hovering around its previous close of 454.81 points.
This was mimicked by the FTSE 100, which saw an early fall of 1.7% before climbing back to, and remaining slightly above, its previous close of 7,484.33 points throughout Tuesday.
It was also a subdued start to the day for the Nasdaq Composite and Dow Jones Induatrial Average.
Energy security risk
With inflation rates being driven, for the most part, by the rising cost of energy, it is unsurprising that the conversation has immediately pivoted from the prospect of war to the price of oil and the implications for Europe.
But talk of an energy crisis across the continent is “premature”, said Amundi global head of emerging markets Yerlan Syzdykov. “Even in the worst years of the Cold War, the Soviet Union and Europe maintained commercial relations based on a mutual need for energy trade.”
In the short run, the growing tension complicates the energy security policies of Germany and the EU, he said, pointing to the decision by German chancellor Olof Scholz to put approval for the Nord Stream 2 gas pipeline on ice.
“Potential disruptions may take place […] and a further escalation is clearly bad for energy security in Europe, but we still see an uninterrupted energy flow from Russia to EU over the medium and long-term,” Syzdykov added.
Market yet to price in the geopolitical uncertainty
“However this unfolds, tensions and uncertainties are likely to run hot for some time to come,” said Hargreaves Lansdown fund manager Steve Clayton. “The market will not like any escalation, nor will it trust any settlement between the parties unless accompanies by a rapid demobilisation of Russian forces around Ukraine.”
It does not bode well for markets, agreed Kelly Chung, senior fund manager at Value Partners, “as it added to investor concerns on the persistently high inflation in the UK and a more hawkish Fed”.
“Investors are already pricing in six to seven rate hikes this year, with the first expected to happen in March.”
While Value Partners does not expect Russia to wage war with Ukraine, it does anticipate that tensions may escalate further, which could exacerbate inflationary pressures.
The market “is still yet to price in the geopolitical uncertainty”, Chung said, “however, we view that the market impact will not last too long”.
She said that direct market impact from geopolitical tensions historically lasts from three weeks to three months.
Safe havens and defence stocks
When it comes to investing in the current environment, Syzdykov said Amundi sees “an opportunity in those sectors which are potentially less vulnerable to international sanctions”, pointing to domestic consumption.
“We would avoid the banking sector, which is being targeted by the sanctions in the EU, US and UK. There are broader opportunities in Russian equities, which will emerge once the geopolitical uncertainties subside.
“If things continue to escalate, the situation is likely to create a risk-off sentiment for broader global markets, where investors may decide to gravitate towards safe haven assets until we get more clarity around the overall security situation in Ukraine.”
Hargreaves’ Clayton flagged traditional safe havens such as the US dollar and yen as being likely to benefit.
“Japan has stayed well away from this argument. Cautious money tends to head to the least risky assets, so it looks likely that US Treasuries and JGBs could benefit.
“Defence stocks, like BAE Systems could provide safe havens; European politicians are unlikely to urge for lower defence spending whilst the Russian bear is growling angrily.”
He continued: “Travel and leisure stocks are always going to react warily to rising international tensions. WizzAir, with its large flight network across Central and Eastern Europe stands out here, but other airlines and tour operators like easyJet and Tui will also be impacted.
“Times of tension are when defensiveness can pay off. People still have to eat, take medicines and get operated upon. Food retailers and drug companies like Sainsbury and AstraZeneca could be interesting, but Tesco’s exposure to Central Europe will not help.
“Stocks with Russian exposure include BP, where exposure comes via an 19.75% shareholding in Rosneft, which is notionally worth around $12bn, having just plummeted by around 25% in recent days. Hyve Group was built around an exhibitions business in Russia and is still substantially exposed to the Russian economy, but a recent deal to acquire Ascential’s portfolio of shows has at least diluted the exposure.
“But perhaps the real message for investors is that in the long run, it rarely pays to worry about the headlines. If it looks as though share prices are coming under pressure, go look for bargains,” Clayton added.
