In the second of a two-part series, Kristy Dorsey looks at how markets have reacted to events in Ukraine

 

It’s now been just more than three weeks since the world woke up to the alarming news that Russian President Vladimir Putin had launched an attack on Ukraine.

Global stock markets plunged in the ensuing days, with London suffering its biggest weekly loss since the start of the Covid pandemic. European bourses similarly endured big falls, with World Bank president David Malpass declaring it a “catastrophe” for the global economy.

Speaking on the first day of the invasion, SVM Asset Management’s Colin McLean pinpointed the concerns that are now ingrained into economic discussions about the war: rising food prices, rising energy prices, and the knock-on implications for investor confidence and consumer demand.

All of this will, as Mr McLean said, lead to “some cooling of UK and global growth”. The question is to what extent, and for how long?

“At times like this, it feels insensitive to discuss investments and the ramifications of these events,” says James Klempster, deputy head of multi-asset at Liontrust. “But we have a responsibility to our investors to manage our funds and portfolios through this period and to communicate our views and any changes we are making.

“We all hoped this year would bring a break from the buffeting we received from Covid. Sadly, Russia’s invasion of Ukraine has eclipsed any notion of a quiet start to 2022.

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“At the present time, the humanitarian impact on the people of Ukraine cannot be overstated and the response from asset classes to short-term and potential longer-term uncertainties is understandable.”

The Bank of England continued pressing ahead with interest rate rises yesterday as inflation concerns outweighed worries that the war could substantially disrupt recovery from the global pandemic. Susannah Streeter, senior investment and market analyst with Hargreaves Lansdown, said the cost of borrowing looks certain to increase further but there is “uncertainty around the table about the path of those rate rises”.

“Similarly, there is still worry among investors about the unfolding events in Ukraine and how the tense situation will affect the economy and monetary policy in the UK,” she added.

Some are more sanguine. In a note to investors earlier this week analysts at JP Morgan said the bearishness has gone too far.

“We believe that the past month’s correction has induced too much negativity in markets, reflected by our market-implied recession possibilities, on the fear that growth will be severely affected by the war,” said the team led by chief global markets strategist Marko Kolanovic.

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“We stay with a pro-risk stance as we do not believe that we will see a recession or that we have entered a sustained bear market.”

Energy prices, and particularly oil, react to geopolitical risk at the best of times. Given Russia’s huge importance as an oil exporter, rising prices will continue to bolster recent strong results reported by oil giants such as Shell and BP.

Because Russia and Ukraine are also major exporters of many other commodities ranging from wheat and sunflower oil to neon gas and palladium, their prices have been soaring as well. The imposition of western sanctions against Russia mean they will likely keep increasing.

As a result, companies that sell discretionary products have been losing out amid fears that consumers will have less to spend after shelling out more for the necessities.

Jason Hollands, managing director of online platform Bestinvest, said higher interest rates are problematic for businesses with high borrowings. However, they do benefit financials, and banks in particular.

READ MORE: Food boss warns Ukraine war could see double-digit inflation

"That's because rising interest rates enable banks to earn more margin between the money they earn investing capital on the short-term money markets and their lending activity to clients," he said.

"Bank share prices have had a spring in their step since the Bank of England first raised interest rates in mid-December, but could have much further to run as bank share prices look inexpensive, especially when compared to forecast earnings for 2023."

He added: “Luckily the UK equity market has an abundance of financials, commodities and energy stocks, more so than other developed markets, which is why the UK market has fared much better than most during a turbulent start to 2022,” he said.

On the other hand, stocks in sectors such as technology are “very vulnerable” when rising inflation is forcing central banks to raise borrowing costs.

“Tech and online stocks – and the US market which is heavily weighted to them – have had a fantastic run in recent years because of benign inflation and ultra-low borrowing costs, but we are now clearly in a very different environment which is why the astronomical valuations these types of business have attracted are now being reassessed by the markets,” Mr Hollands said.