As Russia’s invasion of Ukraine unfolds, the FTSE 100 index was up by 2.19% on the day as of writing this article, after US and Asian markets stabilised overnight. However, this is only the start of a new European landscape in many ways and knock on effects to oil prices and inflation seem likely.
IFA Magazine has compiled the most insightful comments from industry experts over the last two days to help give you a better understanding of how the Ukrainian crisis will affect different aspects of your clients investment portfolios.
Oil and Gas
Daniel Casali, Chief Investment Strategist at Tilney Smith & Williamson, gave his insights on what may happen to oil prices.
“With Russia responsible for around 11% of global oil exports, the invasion could present a risk to supply, which is already tight following low levels of investment. However, we expect the economic impact to be lower compared to previous oil shocks (e.g. 1970s).
“The Eurozone is most exposed given its closer economic linkages and dependency on Russia for natural gas, but we do not expect the invasion to trigger a deep recession.
“If the price of oil stays close to $100 then its direct contribution to inflation will be disinflationary over Q1-Q3 2022. However, if the price increases to $130 inflation will increase over the coming quarters.”
Dave Winans, Credit Analyst, US investment grade energy at PGIM Fixed Income, spoke of the US context
“The events in Ukraine are a wakeup call for realistic energy policy in Europe and the US. The world’s second largest gas field straddles Pennsylvania and West Virginia, but extracting the gas has been problematic given the difficulty of establishing new US pipelines. The irony here is that due to the run up in crude prices, Gazprom is making more money now than it did before the invasion took place.”
William Davies, global Chief Investment Officer at Columbia Threadneedle Investments, surmised.
“We expect to see an increase in energy prices and grain prices across emerging markets which is likely to have an impact on commodities globally.”
Katharine Neiss, Chief European Economist at PGIM Fixed Income, commented on how this may effect the Eurozone asymmetrically.
“The implications are very different for the euro area than the US. For Europe, the events of recent days represent a clear negative supply shock to the region, pushing down on economic activity and up on inflation, creating a dilemma for policymakers.
“The are several channels through which recent tensions reverberate across the region with energy and the attendant hit to confidence high on the list. Additional negative effects come through trade and financial links, though the macro impact of these is limited in comparison.
“Although the escalation is a common shock, it is important to note that its impact is asymmetric across the region, with large euro area countries such as Germany and Italy most exposed given the greater reliance on Russian energy, relative to France, for example.
“Clearly, such a negative shock puts the ECB in a difficult situation, with the prospect of higher and sustained energy price rises feeding through to inflation whilst simultaneously squeezing households and firms. Shocks with an asymmetric regional impact also raise the prospect of euro area fragmentation, with concerns economies such as Italy may be unable to finance debt levels. The potential for euro fragmentation risk further challenges the ECB.
“Given the fluid and challenging backdrop, we expect the ECB to keep its options open, and reinforce its relatively dovish stance, as announced back in December, of a gradual tapering in asset purchases over the course of this year. Recent events also offer the ECB an opportunity to take back control of the inflation narrative – higher than expected inflation outturns are clearly due to an external shock and are outside of the control of the central bank. Such verbal intervention could reassure markets. In addition, we expect the ECB to utilise in real time the flexibility it adopted during the pandemic to ensure favourable financing conditions and prevent sovereign bond spreads from widening.”
Altaf Kassam, EMEA Head of Investment Strategy & Research at State Street Global Advisors, suggests the panic sentiment in the US markets may be overdone.
“The weakness in US markets seems the most overdone, with this move being sentiment- rather than economically-driven, where we feel like the markets have moved from ‘wait and see’ to ‘panic’ mode.
“Notably, despite the effect that the spike in energy prices should have on increasing headline inflation in an environment of already uncomfortable inflation, the market is now pricing in that Central Bank action should turn more dovish, and rowing back on the number and pace of rate hikes.”
Historically Geo-political events prove to have short term effects on market
Daniel Casali, Chief Investment Strategist at Tilney Smith & Williamson, shared his data putting the Ukrainian crisis in an historical context.
“Historically, the market’s response to geopolitical events tends to be short-lived. Our analysis finds that, on average, losses resulting from geopolitical events are erased within one month.”