Stocks in Russia sold off over fears that the Russia-Ukraine issue has the potential to result in a full-blown war. However most analysts are not yet worried that this could lead to a global sell-off in key asset classes, or a contagion effect.
But John Woods of Citi Private Bank feels that the damage from the Ukraine crisis could be very high and the markets at the moment are underpricing the risk associated with it.
He believes emerging markets like India could see higher outflows. “Transmission mechanism through higher energy prices could be quiet profound,” explains Woods. Oil prices have risen already. The Ukraine issue coupled with tapering by the US Federal Reserve, slowdown in China, and the liquidity conditions across central banks around the globe can result in outflows from markets like India.
Below is the verbatim transcript of John Woods's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Latha: Will it be of limited collateral impact on emerging markets (EMs) this Russian aggression in Crimea?
A: No, I don’t think it would be limited. I think it would be profound. I think currently that the market is probably underpricing the risk associated with that conflict. I guess they are looking at the rather limited fall out from Russia’s previous situation in Georgia and assuming that the two are somewhat linked in terms of scale and scope but it is quite a serious set of events that appears to be unfolding.
Latha: Why do you think that it will impact emerging market economies or capital flows into these countries? What are the channels through which this impact might happen because exposure to these markets whether it is economy or whether it is currencies rather limited on the part of Asian emerging markets?
A: Let us not forget that the transmission mechanism through higher energy prices could be quite profound. If for example there was to be some sort of embargo or if there was to be some sort of disruption in energy from Russia for example through Ukraine to Europe then it could have a very profound effect and already we are seeing a spike in the price of oil. Second, let us also not forget that the important contagion; if we were to see for example this conflagration intensify and deteriorate the impact on risk appetite, I think could be quite profound as I suggested earlier in my comments and to the extent we are still battling with tapering in the Fed, we are still battling with the slowing China, we are still looking at liquidity conditions across central bank around the globe. I think that could potentially accelerate capital outflows from countries such as India.
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