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How the Ukraine Conflict Impacts Investors 

 

 

3/4/2014 

Global CIO Andreas Utermann and Global Chief Economist Stefan Hofrichter break down the Russian incursion and what it means for developed and emerging markets, oil prices and Europe’s banking system.
Andreas Utermann
Andreas Utermann
Global CIO
Stefan Hofrichter
Stefan Hofrichter
Global Chief Economist


What’s Happening in Ukraine?

Political risk of different shapes and forms has been a feature of the investment landscape in a number of markets in recent years. And it is never far from the fore in emerging markets.
Developments in Ukraine in the past week have, nevertheless, taken a number of unexpected turns; and it’s difficult to assign probabilities to the broad range of scenarios that may unfold.
The market is currently pricing in further deterioration in the situation with an increase in risk premia across developed markets as well as markets directly affected.
The two key determinants would appear to be the political will of the West (how firm will its diplomatic and economic pushback be?) and the political end game of Russia’s President Vladimir Putin (will military intervention be limited to Crimea?).
If Russia’s aims prove to be more limited than the worst fears and/or Crimea (and other eastern parts of Ukraine) breaks away following a referendum, then the current elevated risk premia may be short-lived (though there will likely be longer-term risk premia effects for Russia).
We see the separation of Crimea as a fait accompli, which the West is likely to live with in the final analysis.


How Are We Positioning Portfolios?

Allianz Global Investors was already underweight Russia and Ukraine ahead of the lead-up to the current crisis.
Beyond the Ukraine-Russia conflict, our asset allocation remains unchanged and still tilted toward risk assets.


What Should Investors Focus On?

Emerging-market debt. For long-term investors, there’s an opportunity to exploit emerging-market debt weakness, in both the dollar and local currency. Our conviction that there is money to be made on a two- to three-year view is stronger than the concern over further short-term weakness, which may or may not happen.
Vulnerable market segments. As we gain better insight on the geopolitical developments, it will become easier to gauge whether or not to change our position. In the meantime, we recommend focusing on areas of the markets that are most likely to be impacted:
 
1. Energy prices. So far, we’ve only seen a small increase in oil prices since the beginning of the political turmoil in Ukraine.
2. Fallout from exposure to banks in Russia and Ukraine. According to the Bank of International Settlements, US and European banks’ exposure to Russia is around $220 billion. This is small relative to their GDP. So far, we haven’t seen any market signals—rising swap spreads, for example—pointing to a significantly greater threat.





The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Emerging markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

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Risk Premia Explained: Returns above the risk-free rate—10-year Treasury yield, for example—that investments are expected to generate. Risk assets generally provide investors with the potential for larger returns to compensate them for the risk they’re taking in those investments.
Market Insights 
AGI-2014-03-04-9083 

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