As the stand-off between Russia and Ukraine continues, Rebecca Jones asks three wealth managers if they are adapting their portfolios...
David Coombs, head of multi-asset, Rathbones
The potential here is that Russia invades Ukraine, gas gets cut off to Europe and energy prices soar. All of that is massively negative for markets.
However, I do not think Putin wants to see his energy exports suddenly cut off. He is not the old soviet, Stalin-esque type leader; he has got to keep the domestic economy rolling on and that is heavily reliant on exports.
So there might be a lot of sabre rattling and chest beating going on but I genuinely feel it is slightly overdone. We have not seen a massive spread widening in emerging market debt; we have not seen that contagion. We have had a little wobble but that is it.
How are you reacting to Russia/Ukraine?
Economically, I do not think the long-term effects of this will be catastrophic. People will think again about gas supply and the whole fracking debate will re-emerge, while questions about Russia’s place in the international community will be raised. However, that is all largely political.
When it comes to gold, I am not rushing out to buy. I am pretty negative on gold anyway. In a global recovery, with average to above average GDP growth in countries like the US and UK, alongside gently rising interest rates over the next two to four years, I see that as a real headwind for the asset class.
If you genuinely believe Russia will look to annex the Crimean peninsula, then you should be buying gold, gilts, US treasuries and nothing else right now. However, I am not ready to do that. Everyone still has too much to lose at the moment, so if markets do wobble a little more, I would be a buyer of equities, not a seller.
Gary Reynolds, managing director, Courtiers Wealth Management
If you are holding large chunks of Russia and emerging Europe, you are going to be a little worried about what is going on. However, we have very little exposure to emerging markets, with only a few holdings in Asia and none in Russia.
There was a requirement, probably, for Putin to do some postulating; however, the future of Russia is so inexorably linked to Europe - Germany being its biggest trading partner and vice versa. Meanwhile, the amount of energy Europe takes in from Russia is enormous.
There is a lot of talk about the West not wanting to do anything to destroy its own interests but it works both ways. It does not help Russia to suddenly cut links with its biggest energy buyers: the world will slow down and it would not be good for trade. The country’s energy companies would see a big downgrade in their revenues.
Considering the amount of vested interests, this is probably not going to go anywhere. Putin has given a show of strength to remind everybody Russia is still there and prepared to use force to protect its interests but that is it.
That means there may be some opportunities in Russian companies if you are prepared to take them. Russia is a gangster economy without a shadow of a doubt but, if you are applying Western value metrics, the valuations - frequently as low as one or two times P/E - are just mouth-watering.
In terms of gold, the situation in Ukraine has helped it bounce back from one of its worst years in ages. However, fundamental demand is down and you are more likely to see the price settle back at about $1,100 per troy ounce than at the $1,350 we have seen lately.
Justin Oliver, investment director, Canaccord Genuity Wealth Management
Having reduced risk in the middle of February, we do not feel the need to take further action in response to the deteriorating situation in Ukraine. In part, this is due to the fact we do not maintain exposure to emerging market equities at the moment.
Analysing the changes to investment strategy that may be necessary as a result of geopolitical developments is a course of action fraught with danger. When making an analysis from a pure economic or financial perspective, we can be confident that businesses and investors will act in a ‘rational’ manner.
However, rationality does not figure prominently in matters of state. Public perception, self-interest and historical issues are as much a driving force behind any decisions that may be made, and the actions taken are very often not ‘rational’ or inherently logical.
Ultimately, we do not believe the situation in Ukraine should have major implications for financial markets in the major countries but much will depend on the response from NATO and, particularly, the US. However, it is entirely feasible that Ukraine could degenerate into a Yugoslavia-style civil war, regardless of any de-escalation of tension between Russia and the West.
There are risks: Russia could decide to invade the rest of Ukraine or the West could respond with more than rhetoric. However, our reading of the situation would currently indicate the US will not be prepared to directly challenge Russia over Ukraine and that NATO would be unwilling to escalate to a military confrontation at this moment in time. Absent an impact on specific markets and/or any further escalation we, therefore, believe the impact of this situation should be limited.
Andreas Koester, head of asset allocation and currency, UBS Global Asset Management Global Investment Solutions
The crisis in Ukraine is extremely serious from a diplomatic perspective and potentially from a humanitarian perspective; less so from a global investment perspective. Outside Russia and Ukraine, the main economic risk is disruption of Russian gas exports that are piped through Ukraine to the European Union.
The broad sell-off in risk assets on Monday 3 March probably reflected concerns over natural gas and whether the conflict could spread to other parts of southern or eastern Ukraine.
In the eye of the storm is Russia's (and the world's) largest gas producer, with a monopoly right to export pipeline gas from Russia. The European market is its main source of profit, accounting for about 30% of gas deliveries but significantly more than half of net gas revenues in 2013.
This firm makes up roughly 14% of Russia's MICEX equities index, and its share price suffered double-digit losses on Monday morning as the Russian index fell by 8%. European equities also fell by some 2%, with investors nervously eyeing industrial companies that depend on gas imports, as well as consumer goods stocks for which Russia is a key market.
However, Russia only accounts for some 5% of the MSCI Emerging Markets index. Ukraine's presence in global equities markets is minimal, though the high risk of a Ukrainian sovereign default this year weighs on emerging market debt indices.
We continue to monitor developments closely in Ukraine. In our multi-asset strategies, we maintain our overweight exposure to global equities. Recently we tactically reduced our equities exposure in some strategies, as we seek to reduce exposure near market peaks and increase exposure in short-term troughs and our exposure to emerging market debt is broadly neutral relative to benchmarks.
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