UBS: Market scenarios – Risks and investment opportunities against the backdrop of the Ukrainian crisis

Her Eleftherias Kourtali

In today’s report, UBS examines the scenarios for the markets after the developments around the Ukrainian crisis, identifies the risks for investors and recommends the wisest strategy in this critical period.

As he points out, the crisis in Ukraine is evolving rapidly. The stock market rebounded from lows yesterday when Putin said he wanted to continue supplying Europe with oil and gas, suggesting he was pleased that Europe was providing continued funding to Russian troops in Belarus and eastern Ukraine. The announced European sanctions, as less severe than expected, have tacitly indicated that the region does not want to risk disrupting Russia’s energy supply, and will therefore virtually continue to fund Russian military action. US markets also recovered from their lows, when Biden announced only moderate sanctions and acknowledged that he intended to minimize the possible effects of the sanctions on the US economy.

According to UBS, the extent of the announced sanctions will be insufficient to prevent Putin from further invasions in the Donbas region, as well as the possibility of limited attacks in other parts of Ukraine or cyber-attacks to destabilize the country. The Swiss bank’s basic scenario is that Russia is seeking to consolidate control of the Donetsk and Luhansk regions, including deploying troops to areas not currently under the control of pro-Russian separatists. Russia may also send more troops to Ukraine in an effort to destabilize the Ukrainian government. If that happens, the West’s response is likely to escalate and include restrictions on international payments or critical imports such as semiconductors.

UBS believes that the limiting factor for Putin will not be Western sanctions but his own estimate of costs a wider resource campaign, the Ukrainian resistance and domestic political support in the event of a wider conflict. He also believes that Putin has a vested interest in continuing to sell energy and other goods to Europe, which is against long-term military involvement. The risk scenario is that the crisis will remain a source of continuing instability for an extended period until a new impasse is reached.

In the extreme risk scenario, which UBS defines as having a lasting and substantial negative impact on global development, the The conflict will escalate to a level that will push Western nations to accept a halt to Russia’s energy flow. If theIf oil prices rise to $ 125 a barrel or higher in two quarters, they will result in about 0.5% lower global GDP growth and higher inflation., affecting consumer power. If Russia’s energy flow is disrupted, higher risk premiums and lower global earnings estimates are likely to cause more long-term losses for stock markets.

What investors should do

The situation is very fluid and extremely uncertain, so UBS does not believe that high chances can be given in individual scenarios. But at the same time, he notes that historically, the greatest risk for investors from geopolitical crises has come from overreaction.

Although it is impossible to determine the exact time and magnitude of the geopolitical impact on the markets, such events generally did not prevent stocks from moving higher in the medium term and corrections due to geopolitical events are usually short-lived for well-diversified portfolios.

UBS believes it is important for investors to maintain a calm stance and a broad outlook, which would help create a fairly strong portfolio to survive the crisis in Ukraine and rising US interest rates, as well as the fact that global growth remains above trends and investment psychology is already weak. So here are five key pointers in moving investors forward from current uncertainty:

1. Maintain a diversified portfolio. By differentiating between regions, sectors and asset categories, investors can reduce their exposure to the peculiar risks associated with the crisis in Ukraine or other potential emerging political risks around the world. The S&P 500 revenue ratio in Russia and Ukraine, for example, is only about 1%. Diversification offers protection in a bear market: in bear markets since 1945, the S&P 500 has fallen by an average of 34.5% while a well-diversified portfolio has lost an average of 20% and recorded a new record high, on average, within 30 months (about two and a half years).

2. Use the goods as a geopolitical compensation measure. Russia accounts for about 40% of the European Union ‘s gas imports and 30% of its oil imports, and is also the world’ s largest supplier of wheat. Ukraine, meanwhile, is an exporter of corn, wheat and oilseeds. Amid the risk of supply disruption, commodities can be an effective “geopolitical hedge” for portfolios, as well as offer an attractive source of returns in an environment of accelerated growth, persistent inflation and higher interest rates. With these data, UBS maintains a negative attitude towards gold and silver, which it believes are likely to face pressure through higher interest rates in the US and a stronger dollar.

3. Position on the strengthening of the US dollar. The dollar is a “safe haven” currency that tends to rally in the face of increased geopolitical uncertainty or a climate of “exclusion” in the financial markets. In addition, expectations for six or seven US interest rate hikes are likely to support the US dollar in the coming months. Therefore, the US dollar is an attractive regular monetary position.

4. Buy winners from global growth. In the context of growing concerns about Ukraine, inflation and interest rates, it is important to remember that global economic growth is accelerating as the COVID-related constraints are lifted. UBS estimates that this will continue to favor equities and cyclical sectors and markets, including energy, finance and the Eurozone. It is worth noting that, despite their proximity to the crisis in Ukraine, the continued outperformance of Eurozone stocks compared to US stocks last month shows that the forces of economic recovery remain strong and potentially still a major driver of global from the unrest in Eastern Europe.

5. Build some defense. As uncertainty is expected to remain high, investors who want to reduce volatility in their portfolios may consider balancing some of their exposure to cyclical stocks or markets with defenses and strategies. The global healthcare industry is still the preferred defense industry for UBS, and dividend hunting, among other things, is an attractive means of improving portfolio risk-return profiles.