What could happen from here?
What is the economic impact?
Table 1: Overview of the direct economic impact on major equity markets within our coverage
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Markets |
Direct economic implications |
Comments |
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US |
· Russia makes up around 1.0% of US’s
total export value and 0.7% of the import value. There is little exposure in
terms of commodities import as well (imports are mostly metals). · Risk is primarily from an inflation upside arising for a sustain period of higher commodity prices. |
· Risk sentiment may weigh on equities but we see little direct economic impact. · Risk of aggressive tightening by the Fed to bring down inflation. |
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Europe |
· Russia makes up around 1.5% of EU’s total export value and 2% of the import value. · Smaller European nations (i.e. Baltic states) are more exposed through trade. Major European economies (Germany, Italy, France) are either net exporters or have relatively lower exposure. · Europe has a higher exposure to Russia in terms of energy supply. Russia supplies around 40% of Europe’s natural gas. Around 20% of the natural gas and 10% of crude oil transits via Ukraine. · The suspension of Nord Stream 2 will keep energy prices elevated. Energy prices may climb further if sanctions target Russia’s energy sector and/or if the war affects gas flows through Ukraine. |
· Risk sentiment may weigh on equities. · Economic impact exists but we believe it is manageable currently. · Macro and earnings backdrop has improved in 4Q, providing some support for European equities. · Economic impact beyond the near-term depends on whether higher energy prices are sustained, making it an emerging risk to watch. |
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Japan |
· Russia is not a major trading partner nor a major commodity exporter. |
· Risk sentiment may weigh on equities but we see little direct economic impact. |
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China |
· Russia makes up around 2% of China’s total export value and almost 3% of the import value. · China imports around USD 30 bn worth of oil from Russia. Supply is likely to remain stable given the recent 30-year deal and uninterrupted pipelines. |
· Little direct economic impact. · China has been easing its policy in order to stabilise its economy. This could be supportive of Chinese equities. |
|
Singapore |
· Russia makes up around 0.2% of Singapore’s total export value and 0.5% of the import value. · While Singapore is a net importer of Russia’s goods. The value is relatively minor. |
· Risk sentiment may weigh on equities but we see little direct economic impact.
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Source: Bloomberg Finance L.P, iFAST Compilations.
*Regional/ country export and import data as of 2020. Other estimates are as of end-2021.
What can investors do?
- Diversifying the portfolio. A diversified portfolio, especially across asset classes, may reduce volatility during this period. In our opinion, Asian markets have lesser direct economic exposure, geopolitical exposure and have relatively more accommodative policies. We recommend Asian ex-Japan equities for a diversified Asian exposure.
- Commodity-related equities as a hedge. Commodity prices are likely to remain at elevated levels in this current environment, making commodity-related equities a decent hedge in the portfolio. Our recommended fund is the JPM Natural Resources Fund. Investors can also consider the Blackrock World Energy Fund.
- A value tilt in equity exposure, as there are certain sectors that stand to benefit from a rising interest rate environment, such as global financials. Our top pick for global financials exposure is the Blackrock World Financials Fund.
- Reduce duration in fixed income exposure. This is to protect against the prospect for higher inflation, as well as a faster-than-expected rate hike environment arising from rising commodity prices.
Chart 1: History shows that geopolitical military events tend to have a short-lived impact on markets – Gulf War and Afghanistan War
Chart 2: History shows that geopolitical military events tend to have a short-lived impact on markets – Iraq War and Crimean Annexation
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Recommended products |
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Asia ex-Japan Equities |
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Commodity-related Equities |
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Global Financials |
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Short Duration Bonds |
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The Research Team is part of iFAST Financial Pte Ltd.
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