Over the weekend we have seen the conflict in Ukraine escalate with Russia tightening its military grip on Crimea. The G7 have condemned Moscow’s violation, whilst Russia has said that it’s protecting the interests of its citizens.
Due to the conflict, the ruble, already down nearly 10 percent this year, fell below 50 to the euro for the first time. It traded at 36.89 rubles to the dollar, also a record, before stabilising around 36.49.
The Bank of Russia decided to temporarily increase the key central bank interest rate by 1.5% to 7% t in an attempt to keep the currency’s fall from driving up inflation further. The central bank will hold its next meeting on March 14. As a result of all this uncertainty we saw global markets fall yesterday as investors have sold out of positions. The Russian Index MICEX has been hit the hardest and we have seen commodities begin to rise with gold and oil both up.
Our view at OCM and our positioning
Our Investment Committee have had a meeting yesterday morning to discuss the events in Ukraine and its potential impact. In summary we do not at this juncture consider the conflict in Ukraine as a “significant market event”. The geo-political risk which is currently driving the negative sentiment is in our opinion at this stage not a contagion that will result in the world stepping back into recession or being at the brink of a global conflict.
We believe that the real threat will be if the conflict causes a disruption to European gas supplies, which will push up prices significantly, resulting in costs in businesses increasing and the result is higher inflation and a slowdown in economic output. This is because 20% of Europe’s gas is transported via Ukraine.
However, we feel our portfolios are currently correctly positioned as they currently have no direct exposure to Russian equities and emerging markets which are the regions being hit the hardest. We do though have exposure to Europe and these assets will be affected because of the scenario above but overall we see this as a blip not a fundamental reason to sell all European equities.
Also our bias towards UK small and mid-cap equities will provide protection to our portfolios, as these types of companies have less global exposure. In addition, the short position we applied to the FTSE 100 over the last couple of weeks will add further layer of protection to the portfolios and smooth out some of the volatility.
What if risk escalates “significantly”?
As always, we continue to monitor the events taking place across the globe. If the situation in Ukraine does escalate significantly, exposing us to a potential “significant market event”, we are prepared to move the portfolios in to cash and other defensive assets, as required. Today though we are happy that we have done enough already and risks are being managed.
To summarise the above, we do not intend to make any immediate changes to the portfolios or go more defensive at this stage unless we see risk increase considerably. At this stage we are not concerned as we feel that a diplomatic solution will be found. In addition, we feel the portfolios are positioned appropriately to reduce downside risk and smooth some of the volatility we are seeing in the markets.
Have a great day, noting if you have any questions please ring a member of the team.