Written by by Kunal Sawhney, CEO, Kalkine
The Russian invasion of Ukraine is the most talked about topic right now. While there is growing support for Ukraine, there is even more anger over Russian aggression that had inflicted a humanitarian crisis. The situation is still evolving, with backchannel peace negotiation talks also in progress. Though de-escalation is yet not in sight after a week of the war and amid regular imposition of sanctions by the Western allies on Russia. Whatever may be the result of the war, its pinch is already being felt by the markets across the globe. Russia holding a major energy supplier position to European Union (EU) has become a key concern.
The UK of its total consumption imports just around 4 per cent of gas in liquid form and around 6 per cent of oil from Russia and is not as dependent as the EU. However, the price to be paid for a faraway conflict has started to make its impact here as well. As of March 2, UK wholesale gas prices hit a record £4.50 per therm, while the average cost of a litre of petrol at UK forecourts was around 151.7p, with the cost of a barrel of oil hitting as high as $115-a-barrel. There are several related factors in play that have led the nation’s energy prices shooting to record high. The gas prices in the UK are linked to the prices in the continent, so if the prices continue to move up, it will have a direct impact on the UK. And at the same time, the government has banned Russian ships from UK ports which could further worsen the situation.
How have markets been reacting?
There was a knee-jerk reaction to the news of the Russian invasion of Ukraine, and the equity markets across the globe turned red. Ten percent or even higher slump so far had been witnessed in some of the major global markets since the start of the war. FTSE 100 is one of them, which has suffered a serious blow in just a week of trade. The fresh volatility in the markets after the jitters of a major central banks rate hike may linger, keeping the markets in the bear zone for some time more.
The flare-up of such geopolitical issues has traditionally brought uncertainty to the markets and despite the fact that the issue was brewing up for a long, markets’ sudden reaction has shown that it wasn’t priced in fully, and more has to come. Now investors are concerned about the supply chain disruption and surge in different commodity prices that would result in even higher inflation.
There is widespread uncertainty in the market at present, and investors continue to flock to safe-haven assets and treasuries while fleeing from the riskier assets.UK investors pulled millions of pounds of investment funds in the month of January, with equity funds suffering the maximum exodus, while there has been a shift towards commodities and natural resources funds in response to rising commodity prices.
While there is fear prevailing, there are risk-takers as well, who had been either waiting for a sharp correction or are ready to utilise the opportunity to go for value pick at extremely cheap prices, ready to lap up hard-hit assets linked to Ukraine and Russia. Meanwhile, the London Stock Exchange, after a week of the war, decided to suspend trading in GDRs of 28 companies with strong links to Russia. There has been a sharp fall in London-listed stocks of Russian companies, and by the time suspension was announced, some had lost almost all their value. Earlier, MSCI had removed Russian stocks from its globally watched indices after the majority of its institutional investors confirmed the Russian equity market to be uninvestable in the present circumstances.
What to expect next?
Energy is the major factor associated with Russia, and war has necessitated the need for the early energy transition. Lots of investment have already started and can be seen in the coming time in the global gas markets, with most of the countries either affected or unaffected looking for energy independence to avert any such incident.
As far as markets are concerned, despite the far-reaching impact of war, investors will keep looking for opportunities this year beyond the pandemonium of the war. The adversity of war getting more proclaimed may lead central banks to be not as aggressive as they were expected to be.
As it is becoming more evident that the conflict won’t turn as severe as previously thought, the corporate profits may not be that much impacted. However, it is also true that the war may not end soon, and the short-term market volatility may continue. Also, the war may not have long-term consequences on the market and, despite the fear of some uncertainty into the global growth outlook, may recoil soon. Investors should not overlook the long-term opportunities which these kinds of adversities present.
