Simmering Ukrainian conflict hits markets

The ongoing confrontation between Ukraine and Russia in the Crimean peninsula has further upped the ante in terms of conflict, and most importantly its impact on the investment markets. Unlike Syria, Egypt and many of the Arab Spring protests, Ukraine is actually important in investment terms.

Ukraine is already on the brink of a default in its economy, although support has been signalled by developed markets and the IMF, but further uncertainty is likely to hit commodity prices, in addition to the obvious emerging market equities and debt sectors, particularly Russia.

Asoka Wöhrmann, co-chief investment officer at Deutsche Asset & Wealth Management, notes: “The entire situation bodes ill, especially for Russian assets but also for the entire region of Eastern Europe including Turkey, as 12 per cent of Crimean’s are Tatars who have historical ties with Turkey and dislike Russia.

“Russian and Ukrainian asset markets are from our point of view expected to be hit most, while wide-spread contagion will be dispersed across asset classes. Russian energy companies are likely to be hit especially in the case of delayed or failed payments for gas deliveries from Ukraine.”

Whatever the outcome of the Russia – Ukraine situation, emerging markets are likely to remain in the political spotlight, not least because of the rush of elections coming up in 2014. Most obvious, is the forthcoming elections in Turkey at the end of March, where the surprising hike in interest rates to 11 per cent in January, as part of efforts to deal with its current deficit are likely to weigh on voters minds.

However, not all investors follow the same sentiments. Gary Greenberg, lead portfolio manager and head of Hermes emerging markets, notes: “The combination of tapering and political unrest has hit the Turkish market hard, resulting in a 30 per cent drop in dollar terms from the peak in May 2013. Turkey’s currency has lost more than 25 per cent since May 2013, when tapering was first mentioned. Given these headwinds, the market has de-rated and is now looking cheap.

“The political situation is quite fluid and thus difficult to handicap, but on a tactical basis we believe a political solution will be found and companies will find a way to grow profits.”

Meanwhile the other four members of the so-called ‘Fragile Five’ are expected to have some form of election, with Indonesia, South Africa and India scheduled in the next few months, and Brazil holding presidential elections in October.

For many of these the macroeconomic situation, particularly debt and currency issues, could have a significant effect on the outcome, but whether political upheaval will help or hinder emerging markets will remain to be seen.