24-02-2022, 03:43 PM
#1 Best-Case Scenario: both sides find “face-saving” diplomatic ways to back down: Russia backs away from Ukraine (outside of already occupied territories), Russia gets some of what it demands for. In this case, we should see a return to normalcy soon and relief to equity markets (think back about Crimea).
- Russia stations some troops for “peace-keeping” and withdraws the rest; US/EU don’t impose further sanctions (most recent ones are barely “scratching the itch”)
- Global equity markets will resume focusing on other factors like Fed policies
- Without sanctions limiting Russian supply, oil will not see any supply shock. Oil prices may continue to increase due to supply-demand imbalances, but Russia-Ukraine situation will not be a key driver.
#2 "Middle-Ground" Scenario*: Russia doesn’t back away from full-scale invasion - Uncertainties persist in region
- If western allies impose tougher sanctions on Russia’s energy exports to Europe, energy markets may be in for a sharp supply shock, leading to aggressive spikes in oil prices
- We will see higher inflation levels overall (potentially leading to greater monetary tightening by Fed/EM central banks), as well as lower economic growth due to higher energy costs
- Any supply chain shock will lead to sharp spikes in oil prices, which will generally be negative for global equities. Any company that has large dealings with Russia is also at risk due to potential sanctions
- Europe is already facing an energy crisis, which may be exacerbated if Russia cannot export oil/gas through Ukraine
- Unlike the US, EU is a net-importer of energy, with almost 40% of energy from Russia, and 20% of this is via Ukraine. Any diversions of oil/gas using other pipelines/transportation methods (i.e. non-Ukraine) will involve additional costs that will further affect profitability of companies (so far from the BBC broadcasts, Ukraine providers do not see Russia weaponising this
#3 Worst-Case Scenario: Russia conducts full-scale invasion into and occupation of Ukraine. Further disruption in energy/oil supply could bring global inflation to new levels and have negative impact on equities markets worldwide.
*Our base case is the “middle ground” scenario, with market volatility expected to continue in the near term*. Investors can expect the current Russia-Ukraine tensions to be contained in this region as per past crises, and we do not expect much disruption for the majority of the world e.g. 2014 Crimean conflict saw multiple rounds of sanctions, with markets eventually looking past the event in a space of 1-2 months.
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Thus what should investors do?*
_*Not for the conservative investors*_
1. We think that Russian equities represented by the RTS index will continue to fall for a while until all the current negatives are taken in. RTS Index having fallen 24+% YTD, thereby making Russian equities more attractive after the sell-off. Based on our in-house estimate, Russian equities provide a 55+% upside by FY23 (Bloomberg Finance L.P, iFAST estimates, 14 Feb 22).
- Russia stations some troops for “peace-keeping” and withdraws the rest; US/EU don’t impose further sanctions (most recent ones are barely “scratching the itch”)
- Global equity markets will resume focusing on other factors like Fed policies
- Without sanctions limiting Russian supply, oil will not see any supply shock. Oil prices may continue to increase due to supply-demand imbalances, but Russia-Ukraine situation will not be a key driver.
#2 "Middle-Ground" Scenario*: Russia doesn’t back away from full-scale invasion - Uncertainties persist in region
- If western allies impose tougher sanctions on Russia’s energy exports to Europe, energy markets may be in for a sharp supply shock, leading to aggressive spikes in oil prices
- We will see higher inflation levels overall (potentially leading to greater monetary tightening by Fed/EM central banks), as well as lower economic growth due to higher energy costs
- Any supply chain shock will lead to sharp spikes in oil prices, which will generally be negative for global equities. Any company that has large dealings with Russia is also at risk due to potential sanctions
- Europe is already facing an energy crisis, which may be exacerbated if Russia cannot export oil/gas through Ukraine
- Unlike the US, EU is a net-importer of energy, with almost 40% of energy from Russia, and 20% of this is via Ukraine. Any diversions of oil/gas using other pipelines/transportation methods (i.e. non-Ukraine) will involve additional costs that will further affect profitability of companies (so far from the BBC broadcasts, Ukraine providers do not see Russia weaponising this
#3 Worst-Case Scenario: Russia conducts full-scale invasion into and occupation of Ukraine. Further disruption in energy/oil supply could bring global inflation to new levels and have negative impact on equities markets worldwide.
*Our base case is the “middle ground” scenario, with market volatility expected to continue in the near term*. Investors can expect the current Russia-Ukraine tensions to be contained in this region as per past crises, and we do not expect much disruption for the majority of the world e.g. 2014 Crimean conflict saw multiple rounds of sanctions, with markets eventually looking past the event in a space of 1-2 months.
[
Thus what should investors do?*
_*Not for the conservative investors*_
1. We think that Russian equities represented by the RTS index will continue to fall for a while until all the current negatives are taken in. RTS Index having fallen 24+% YTD, thereby making Russian equities more attractive after the sell-off. Based on our in-house estimate, Russian equities provide a 55+% upside by FY23 (Bloomberg Finance L.P, iFAST estimates, 14 Feb 22).
I, being poor, have only my dreams; I have spread my dreams under your feet; Tread softly because you tread on my dreams.