Fed concerns turned investors away from Russia-Ukraine risk

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(Bloomberg) — A potential escalation in the Ukraine border standoff risks hitting economies and businesses around the world and catching a number of investors off guard.

Long-simmering tensions over the buildup of Russian troops in the region could trigger a fresh bout of market volatility, just as equity markets struggle to digest a less favorable macroeconomic backdrop, which triggered the recent rout.

Amid fears of a hawkish move by the Federal Reserve, investor risk assessments have mostly focused on concerns about central bank policy tightening, eclipsing other risks such as the potential for military conflict over eastern fringe of Europe, according to UBS strategists led by Bhanu Baweja.

“Little to no Russia-Ukraine risk appears to be considered,” they said in a note earlier this week.

Europe is already grappling with rising living costs and a difficult recovery from the coronavirus pandemic. According to Amundi SA, Europe’s largest asset manager, the uncertainty linked to a possible Russian invasion – which the Kremlin has denied planning – could plunge the region into stagflation.

Investors should “be ready to reduce risk if the situation deteriorates materially,” said Amundi strategists led by Alessia Berardi.

With the prospect of energy disruptions and punitive sanctions, German and Eastern European companies, Russia-focused banks and companies with significant sales in the country appear exposed. Although the fallout is not expected to last long, the impact could be brutal.

Here is how the crisis should affect the markets:

German and Eastern European spinoffs

Russia is Europe’s main energy supplier, and any interruption in gas supplies would be a particular problem for German manufacturers such as Volkswagen AG, Siemens AG and BASF SE. Europe’s largest economy has become even more dependent on Russian gas by shutting down nuclear power plants.

German stock markets look more vulnerable than indices in other countries, Goldman Sachs Group Inc. strategists led by Lilia Peytavin wrote in a note.

Amundi strategists said a hit from military conflict would be difficult for Eastern Europe, especially markets like Warsaw.

“Some regional companies have business exposure to Ukraine and some Ukrainian stocks, particularly in the agricultural sector,” they said in a note.

Wider Training Effects

Goldman strategists said European companies such as tire maker Pirelli & C. SpA would suffer from higher prices for oil derivatives.

JPMorgan Chase & Co.’s own list of stocks with heavy Russian exposure includes German packaging company Verallia Deutschland AG, London-based Eurasia Mining Plc and Austrian oil services company Petro Welt Technologies AG.

In Asia, companies ranging from Food Empire Holdings Ltd. of Singapore to Japan Petroleum Exploration Co. and coffee maker CCL Products India Ltd. seem vulnerable due to their high rate of sales in Russia. It’s also a problem for Swiss-based beverage bottler Coca-Cola HBC AG, according to Morgan Stanley strategists.

bank hit

Morgan Stanley strategists said Sberbank, Russia’s largest bank, is the well-held stock most exposed to geopolitical risk.

Raiffeisen Bank International AG became the first major European lender to say it was putting money aside to deal with potential fallout from the crisis this week. The Austrian lender depends on Russia for 19% of its revenue, according to Goldman.

“Business is running smoothly despite geopolitical tensions,” chief executive Johann Strobl said in a statement. “Nevertheless, we are monitoring developments very closely.”

Already hit

Russian stocks have underperformed in recent months amid heightened tensions with the West and the prospect of sanctions.

VanEck Russia ETF, the largest exchange-traded fund that tracks Russian stocks, continues to be a vehicle for betting against the market. In early January, short interest soared to over 30%, the highest in at least a year. The level slipped to 26% on Friday, according to data from S3 Partners.

How Russia risks another wave of sanctions against Ukraine: QuickTake

Safety areas?

Despite the widespread risk, some companies could be better positioned. European oil and gas companies – such as France’s TotalEnergies SE and Norway’s Equinor ASA – would benefit from a surge in energy prices, while healthcare stocks also tend to outperform when risks rise, according to analysts. Goldman strategists.

Meanwhile, Morgan Stanley strategists led by Marina Zavolock have said Russian food retailer Magnit PJSC and digital bank TCS Group could benefit from de-escalation, while Lukoil PJSC offers a cash dividend yield of 23%. %.

Short-lived turbulence

Despite the risk of conflict, equity strategists have yet to change their general outlook for European markets. Even a military incursion is expected to trigger a short-lived rout akin to the turmoil that followed Russia’s annexation of Crimea in 2014.

In this case, Goldman estimates a negligible negative impact on the European economy. Any cost in terms of a slowdown would be offset by a weaker euro, which should boost corporate profits across the continent.

“Historically, military conflicts – so long as they were relatively localized – have not tended to derail financial markets for too long,” JPMorgan strategists said in a note in January.

©2022 Bloomberg LP

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