Ukraine Crisis Poses Little Systemic Risk, Investors Say

(March 13, 2014) — The Crimean crisis has caused equity market risk and volatility to soar in Ukraine and Russia, but the spillover into neighboring countries has been minimal, according to research by Axioma.

The report noted that the Russian equity market had fallen 20% year-to-date as of March 7. The ruble also fell almost 10% relative to the US dollar in the same time period. While the Ukrainian stock market was slightly up, the hryvnia had dropped about 15% against the dollar.

“Investors view this as a contained issue, specifically concentrated to Ukrainian and Russian markets,” Melissa Brown, senior director of applied research at Axioma, told aiCIO. “It’s somewhat better news for the other markets.”

Yet these short-term fluctuations in stock markets and currency values have managed to rock certain indexes.

The FTSE emerging market index fell about 3% while the VIX “crept up to the upper teens, which is still well below its long-term average,” according to Russ Koesterich, BlackRock’s global chief investment strategist. Russia comprises about 7% of the FTSE emerging market index while Ukraine is “not in it at all,” according to Axioma.

Ukraine’s extra-market volatility had risen the most among Eastern European countries since the beginning of the year, nearly tripling its January figures, and currency risk also saw a hike of almost 200%.

Russia’s volatility doubled since the start of 2014 and the risk for the ruble rose 22% in the same time period, the report found.

“When we combine the risk and return perspectives, we see little change in risk/return tradeoff,” Brown said. Aside from Russia and Ukraine, most nations’ risk/return tradeoff remained largely stable since January.

“To date, the fallout from the Ukrainian crisis has been largely confined to the emerging market debt, emerging market equity, and commodity markets,” said Mark Burgess, CIO of Threadneedle Investments. “At current levels, emerging market local currency debt appears to offer value, although we expect both the hard and local currency markets to remain volatile in the short term.”

Axioma concluded that the risk for broad emerging market indexes increased minimally overall.

“We can expect to see continued volatility if the tensions between Ukraine and Russia are sustained,” Brown said. “But it’s hard to say how the Ukrainian markets would be impacted long-term. It’s a really small market and so the likelihood of it impacting other markets is small.”

Glyn Owen, investment director of Momentum Global Investment Management agreed that the crisis posed only a minor threat to global markets.

“Our view is that markets will be more nervous short term but this is unlikely to derail the continuing bull market in equities, which remain well supported by high levels of liquidity and by the prospect of continuing recovery in the global economy and strength in the corporate sector,” he said. “The issue is, however, a timely reminder of the risks of investing in emerging markets.”