A potential escalation of the standoff at Ukraine’s border risks hitting economies and companies around the world, and catching a number of investors off guard.
The long-simmering tensions over Russia’s troop buildup in the region has the potential to trigger a new bout of market volatility, just as equity markets struggle to digest a less favorable macroeconomic backdrop, which sparked the recent rout.
Amid fears over a hawkish shift from the Federal Reserve, risk assessments by investors have focused mainly on concerns around central banks tightening policy, eclipsing other risks such as the potential for military conflict on Europe’s eastern fringe, according to UBS strategists led by Bhanu Baweja.
“Little or no Russia-Ukraine risk appears to be priced in,” they said in a note earlier this week.
Europe is already battling surging living costs and a rocky recovery from the coronavirus pandemic. Adding uncertainty from a potential Russian invasion—which the Kremlin has denied it’s planning—could plunge the region into stagflation, according to Amundi SA, Europe’s biggest asset manager.
Investors should “be ready to reduce risk should the situation materially deteriorate,” Amundi strategists led by Alessia Berardi said.
A potential conflict would hit the euro-area with inflation already at record
With the prospect for energy disruptions and punitive sanctions, German and Eastern European companies, Russia-focused banks and companies with significant sales in the country look exposed. While the fallout isn’t expected to last long, the impact could be sharp.
Here’s how the crisis is expected to affect markets:
German, East European Fallout
Russia is Europe’s main energy supplier, and any disruption to gas deliveries would be a particular issue for German manufacturers such as Volkswagen AG, Siemens AG and BASF SE. Europe’s largest economy has become even more reliant on Russia gas as it turns off nuclear power plants.
Germany’s equity markets look more vulnerable than other country indexes, Goldman Sachs Group Inc. strategists led by Lilia Peytavin wrote in a note.
Amundi’s strategists said a blow from military conflict would be hard for Eastern Europe, especially markets like Warsaw.
“Some regional companies have business exposure to Ukraine and some Ukrainian stocks, especially in the agricultural sector,” they said in a note.
Wider Ripple Effects
Goldman strategists said European firms such as tiremaker Pirelli & C. SpA would suffer from a rise in prices of oil derivatives.
JPMorgan Chase & Co.’s own list of stocks with high exposure to Russia includes German packaging company Verallia Deutschland AG, London-based Eurasia Mining Plc and Austrian oil services company Petro Welt Technologies AG.