Alan Higgins, chief investment officer, Coutts
The complex situation in Ukraine brings potential for heightened volatility in the near term amid concerns of an escalation into a wider conflict. While the outcome is impossible to predict, our central scenario is that a wider conflict will ultimately be avoided.
As such, our six to 12 month views remain unchanged. We continue to expect a gradually improving global recovery and see equities outperforming bonds this year.
We still see Europe as the most attractive equity market over this longer-term view, supported by an improving economic and earnings outlook, and at this point we would see a substantial correction as a potential buying opportunity. For our longer-term strategic portfolios, we maintain our preference for equities over bonds and for Europe within equities, through what we expect will be a period of near-term volatility.
However, after a strong performance and strong fund flows into European equities, they may be susceptible to profit taking in the near term. US Treasuries may also be supported in the near term by safe-haven demand. For investors with shorter time horizons, a tactical reduction of exposure to European equities and the euro and/or an increase in exposure to Treasuries may make sense.
Victoria Hasler, fund analyst, Brewin Dolphin
Last week saw some sizeable flows into commodity funds, and in particular into precious metals. This was not overly surprising given the events in Russia/Ukraine and given the falls seen in the gold price towards the end of last year. That said, the situation in Ukraine is a fluid one and whilst gold might be a good hedge of an intensification it might equally be an expensive asset to hold if geopolitical tempers simmer and the US weather improves. If you do want to hold gold an actively managed fund, such as the Blackrock Gold & General fund remains preferable. Funds can allocate towards companies which are geared into the improving gold price, rather than holding the commodity direct which can be expensive.
Craig Botham, emerging markets economist, Schroders
The impact of rising commodity prices, as a result of events in Ukraine, could have a knock-on effect on market sentiment and economic growth.
There are echoes of the Georgia-Russia crisis of 2008 in current events in Ukraine, with the difference being that Ukraine has greater political significance.
Russia’s chief exports are oil related, so any sanctions will likely drive up energy costs and could transmit a stagflationary shock to the global economy. Ukraine is a major wheat producer, so we would expect food prices to be similarly adversely affected. The impact on the supply of natural gas is unclear: it’s really in no one’s interests to turn the flow off. Russia will not want to pre-empt sanctions, Ukraine doesn’t want to anger its European allies or invite further Russian aggression, and the European Union doesn’t want higher energy costs. In a rational world the gas would stay on until trade sanctions are implemented. China will be watching closely given its dependence on energy and food imports, and we might see Chinese diplomatic pressure if the issue isn’t speedily resolved.
On the market front, concerns over a spike in energy and food costs should impact sentiment globally, but particularly assets in the region: Central and Eastern European markets and currencies will likely suffer, as will countries dependent on energy imports. Within emerging markets, India could be quite exposed on this front. Commodity markets should, broadly speaking, see price increases. Ukraine’s role as a wheat exporter will push up agricultural prices, while uncertainty over oil and gas supply will push up the energy matrix. This could all be supportive in the short-term for some commodity exporters, particularly if they are energy-independent.
