Russia–Ukraine tensions and rising commodity prices

Markets in turmoil on rising geopolitical tensions

The worst-case scenario has now materialised, with Russian forces intensifying attacks on Ukrainian targets overnight. This has inevitably prompted further international condemnation, seeing markets in turmoil for a second consecutive day.

US President Joe Biden said that his country would impose further economic sanctions on Russia, including its energy sector. These measures are designed to undermine the Russian economy, restrict Russian companies from accessing US technology, and blocking Russian financial institutions from seeking foreign financing. More details will be made public over the coming days, but Biden pre-emptively mentioned that cutting off Russia from SWIFT remains unlikely, at least for now.

Market sentiment remains highly volatile. The largest sell-off was seen in Russian equities and bonds, however, most major markets experienced losses. The AAII US Sentiment Indicator showed that a majority of investors are bearish. In Asia, the NIFTY closed down 3.65%, followed by the Nikkei (-2.41%) and Hang Seng (-0.66%), whereas the Shanghai Composite was up 0.46%. Most Asian currencies (barring the AUD and CNY) depreciated against the USD.

Economy and inflation

Much will depend on how the situation evolves in the coming months. The impact will be more severe should the situation morph into a protracted conflict between major powers. Although we have not revised our GDP growth projections, we expect that the impact will be felt most strongly in Europe: GDP growth will probably decline by around 0.3%, with risks being tilted to the downside.

Global inflation is set to increase due to supply chain disruptions. In particular, oil prices broke through the USD 100/bbl level on 25 February and we believe that there is scope for these to continue rising towards the USD 150–170/bbl range.

Russia is one of the world's largest exporters of raw materials, including nickel (49% of global exports), palladium (42%), diamonds (33%), aluminium (26%), platinum (13%), steel (7%) and copper (4%). Russia and Ukraine also export large amounts of wheat (30%) and corn (15%). Ukraine is an important producer of neon gas (65%), which is used in the manufacture of semiconductors and electric vehicles. The price of these commodities is therefore likely to rise.

Asian economies will be impacted by rising prices. The economies that are most exposed in terms of energy imports will be affected first, namely: Hong Kong, South Korea, Thailand and India. Should rising inflation lead to a decline in global demand, Asian exporters will also feel the squeeze from H2 22. These include: China, South Korea, Vietnam, Taiwan and Malaysia.

The impact on global sectors

• Energy: The oil & gas sector will benefit from the current environment of rising prices, especially in an event of less supply coming out of Russia. Oil prices still have room for further upside gains before demand is hurt. Demand will slow if oil breaches USD 150/bbl. However, anything above USD 100/bbl puts pressure on net energy importers in Asia, where the impact of rising oil prices will be felt more keenly.
• Pharma: The global pharmaceutical sector traditionally plays a defensive role in situations of heightened geopolitical risk. We expect this will also be the case in the coming weeks. Large pharmaceutical companies with good-quality earnings and diversified footprints should perform well amid rising global uncertainties.
• Commodities: This sector is a hedge against inflation, especially metals, of which Russia is a large producer.
• Gold: Gold has advanced to its highest level in more than a year and may continue to benefit from rising geopolitical risks.

Summary

The Russia–Ukraine conflict has worsened, leading to a serious escalation that may have potential consequences for the global economy and for global inflation. Europe will bear the brunt of this cost. However, we cannot rule out headwinds for Asian exporters should global demand decline significantly.

The mood will therefore remain defensive. While many assets have already priced in a negative outcome, there are still opportunities to reposition portfolios to navigate this difficult environment.

The global energy sector and some industrial metals may benefit from the current environment of rising prices. Defensive sectors should also experience increased inflows in the coming months as investors adapt to geopolitical developments.