A soldier of the Ukrainian Armed Forces takes part in a tactical military exercise at a training ground in Rivne region, Ukraine on February 16, 2022.
Ukrainian Presidential Press Service via Reuters
Assets across the spectrum have been affected by geopolitical tensions, including oil natural gas, wheat and Russian ruble And safe havens like goldAnd government bondsThe Japanese yen and the Swiss franc.
Philip Lisbach, chief global strategist at Credit Suisse, told CNBC earlier this week that any confirmed de-escalation would give a boost to risky assets after a period of uncertainty and volatility.
“If we have, let’s say, a resolution in terms of the geopolitical issues we are currently facing, I imagine the global economy is taking a breather, the risky elements in the market can certainly recover, cyclicality and value trade will probably do well, European stocks in particular that have been hit For pressure, we assume they can continue to outperform, so we will definitely look at that angle specifically,” said Lisebach.
General geopolitical hedges
Given the wide range of potential outcomes of the current crisis, investors have been reluctant to define a base case scenario, opting instead for careful portfolio hedging to mitigate the potential downside risks of a Russian invasion, while capturing some of the positive aspects of this calming event.
“We rarely look at the physical geopolitical risk position, because it is very opaque. However, we do have some general geopolitical hedges in the portfolio, particularly gold and, depending on the source of risk, some exposure to oil, as well as said Anthony Rayner, multi-asset manager at Premier Miton Investors, “Of course, some government bonds, albeit with a reduced duration.”
Bhanu Baweja, chief strategist at UBS Investment Bank, argued earlier this week that beyond energy and Russian assets, markets haven’t actually identified a significant amount of risk.
“We’ve seen stocks pull back a little bit, but if you look at consumer durables – because that’s the sector or sub-sector that will definitely be affected by weak growth and higher inflation – in Europe, that sector is doing a lot better than it is in the US.”
Bawaja added that US high-yield debt is underperforming Europe, while the euro has remained relatively flat.
Markets are tracking “playbook from 2014”, Bawega suggested, when Russia first invaded Crimea and later impose sanctions against Russia over the summer.
“During that period, what really happened was some parts of CEE FX were affected, and oil went up a little bit in the first iteration, it went down in the second, so not much happened in the stocks, so it really became a local event,” Bouja told CNBC on Tuesday.
“This time around it looks more serious, but I don’t think investors want to completely change their mindset and might want to look for hedges, rather than change their entire underlying portfolio.”
Forex is seen as the best hedge
Regarding hedging, Bawaja noted that with stocks and bonds already high volatility due to central bank speculation, investors should look to the foreign exchange markets, where volatility remains relatively low.
“Similar to 2014, I will be looking at foreign currencies in Central and Eastern Europe, and places like the pole-dollar (zloty) or the Czech dollar (krona), to hedge,” he said.
“Russian assets have moved a lot, so with energy they put a lot of risk, which also means that if the situation gets better, you shouldn’t really see global stocks go up so much from that, you should see Russian assets move up and energy go down.”
If the situation escalates, Bouja suggested hedging through foreign exchange rather than buying defensive stocks or favoring US assets over Europe.
“If we have to do it within the stock, we think Dax European banks may be the best hedge.”
While stock markets in Russia and around the world still appear sensitive to geopolitical developments, the ruble has remained relatively strong near the 75 mark against the dollar, despite some volatility.
The inflows into the ruble are likely to make it Russia’s most resilient asset class, as rising energy and gas prices point to strong current account surpluses in Russia, Luis Costa, head of CEEMEA FX and pricing strategy at Citi, told CNBC Thursday.
“Let’s not forget that Russia was buying foreign currencies, they used to buy dollars as a derivative in financial law, and they stopped buying dollars about a month ago in order to prop up the currency,” Costa said.
“This makes the natural inflows in the ruble more positive for the currency, so we believe that – in the entire asset group of ruble risk, Russian risk, credit, rates, bonds and FX – FX trading will continue to be the most fluid piece of the puzzle here.”
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