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Mar 03, 2014, 06.05 PM IST | Source: Moneycontrol.com

Ukraine crisis: Russian mkt slumps but no contagion seen

Even as stocks in Russia have sold off on the fear of a full-blown war with Ukraine on the issue of the Crimea region, which falls under Ukrainian sovereignty, analysts are not yet worried this could lead to a global sell-off in key asset classes.

Even as stocks in Russia have sold off on the fear of a full-blown war with Ukraine on the issue of the Crimea region, which falls under Ukrainian sovereignty, analysts are not yet worried this could lead to a global sell-off in key asset classes.

After the Russian government approved a military intervention and virtually took the Crimean peninsula under its control – Ukraine termed the move as an invasion -- analysts believe much is at stake for both countries to let the situation escalate to a point it could worry global markets.

The two countries have had regular skirmishes in the past over the region where more than half residents are ethnic Russians.

Also read: Why the Ukraine crisis matters to the world

“Most people believe that this would be a localized problem,” said Patrick Legland, Global Head of Research, Societe Generale. “Russia has too much to lose if it lets the situation escalate.”

Legland added that any military escalation [in which other countries could step in] would impact supplies of natural gas, which could harm the Russian economy.

But the impact of the military action was immediately visible today in the Russian markets, with the stock market falling over 10 percent at the time of writing, the ruble sinking to a record low against the dollar, and the Russian central bank having to raise interest rates sharply to tame the currency’s fall.

“For Russia, the status quo is bad enough to keep people out of it,” said Micheal Harris, a managing director with Bank of America who overlooks equity strategy across emerging countries in Europe, Africa and Middle East. “We need to see not just lack of escalation. We need to see de-escalation.”

But Harris said the message from the global perspective is that this would not spiral out of Russia.

“The Russians have a strategic view that they don’t want to escalate [from here],” he said. “Given the way the West has approached Russia – there have been red lines and strong condemnations. If it [an aggression] happens in extreme fashion, NATO is likely to show up at Russia’s doorsteps.”

“But I would be surprised if markets quickly realize this.”

For the market to stop fearing the worst-case scenario, “it will probably need more comfortable news flow,” Harris said.

Even as emerging-market currencies have been pressured in the Ukraine turmoil, Harris said the asset classes have been over-sold anyway “but if the scenario plays out as I expect it to, most non-Russian and non-Ukrainian assets look favourable.”

The view was shared by Jeff Chowdhary, Head of Emerging Markets Equities at London-based F&C Asset Management Plc, which has £82.1 billion assets under management.

“When you get such flare-ups, most investors run for safe havens such as gold and yen,” he said. International prices of the yellow metal climbed 1 percent to USD 1,344 per ounce today.

“But do I think this will lead to wider conflict? No. The expectation is that the market will go down 3-4-5 percent, but then it will bounce back.”

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