This article first appeared in Capital, The Edge Malaysia Weekly on February 21, 2022 - February 27, 2022

NEWS of a possible invasion of Ukraine by Russia has sparked worries that risky assets such as equities could face a heavy sell-off if the tensions escalate.

At the time of writing, the situation remained tense. Reuters reported that there was a growing Russian military presence at Ukraine’s borders, and The North Atlantic Treaty Organization (NATO) was questioning Moscow’s stated willingness to negotiate a solution to the crisis.

This was in contrast to Russia’s claims last Tuesday that some of its military units had returned to their bases after exercises near Ukraine.

Despite the geopolitical noise, analysts do not think investors should take the drastic step of trimming their holdings in equities.

“If you are conservative, you might want to scale back some investments to wait for opportunities to come. But if you are a long-term investor, I don’t see any major problem with this geopolitical issue,” Lee Chung Cheng, head of research at JF Apex Securities, tells The Edge.

Should it become a full-blown conflict, global markets will see a knee-jerk reaction. Chung believes, however, that fundamentally, investors are more concerned about US rate hikes.

“2022 is a year of transition from the ultra-low-interest-rate environment. At the same time, investors will assess the prices of risky assets, so there will be volatility,” he adds.

MIDF Amanah Investment Bank Bhd research head Imran Yassin Yusof is of the opinion that the impact of the Russia-Ukraine crisis will be mainly confined to the European markets, unless it spills over to the global stage, which he does not think will happen at the moment.

“It might not heat up any further and it doesn’t seem that Russia will invade Ukraine,” he says, adding that investors should monitor the crisis before making the decision to lighten their position in the stock market.

Furthermore, market volatility does provide opportunities for investors, he points out. For instance, foreign investors may consider investing in the Southeast Asian region when the US hikes interest rates this year. Year to date, there has been about RM1 billion in foreign net inflows into local equities.

“Investors have to be choosy in stock picking. Even without the Russia-Ukraine conflict, we think that oil and gas (O&G) should be the beneficiary for this year,” Imran adds.

In the wake of the heightened tensions, global stocks tumbled last Monday owing to fears of an imminent attack by Russia and a number of countries urging their citizens to leave the region. Stocks rebounded on the following days as investors took stock of the situation while tensions eased when Russian President Vladimir Putin said some troops were being withdrawn from the Ukrainian border and that he was open to talks with Western powers.

The local market bellwether FBM KLCI was not spared and similarly rebounded when tensions eased somewhat.

Meanwhile, oil prices surged to a seven-year high of over US$90 a barrel on fears over Russia’s attacks on Ukraine.

“O&G counters did not go in tandem with crude oil prices last year, mainly because there was a lack of buying from foreign investors due to the environmental, social and governance (ESG) issue and a shift to green energy. If oil prices keep going up, I would expect some thematic play, like what we are seeing for plantation stocks at the moment,” says Lee.

That said, he remains cautious about earnings for O&G stocks.

“In the past few years, O&G companies did not really bid for a lot of projects and there was not much capex for expansion,” he adds.

Brent oil price settled at US$92.85 a barrel as at 5pm last Thursday. The Bursa Malaysia Energy Index has been on an uptrend since the end of 2021, having jumped 14.4% in the past two months.

Russia is the world’s third-largest oil producer, and it supplies about 40% of Europe’s natural gas.

The price of safe-haven gold jumped to the highest level of US$1,892.91 per ounce since June 2021 last Thursday.

The Russia-Ukraine conflict is also a boon to the plantation sector, as Russia and Ukraine produced 12.9 million tonnes of oilseed crop last year and this is forecast to rise 10.8% to 14.29 million tonnes in 2022, according to RHB Research.

If the oilseed crop from the region were disrupted, this would affect soybean prices and have a knock-on effect on palm oil as well.

The research house thinks in the event that war does break out, prices of commodities, including crude palm oil (CPO), could rise further and potentially stay higher for longer. However, if tensions ease, profit-taking could ensue with a retrace in commodity prices.

“Our base case assumption is that there is no war — which means CPO prices should still moderate in 2H2022, given higher stock/usage ratios and normalising weather,” it adds.

CPO prices hit record highs last Monday, with futures for April delivery rising to RM5,697 a tonne. In the past week, the Plantation Index on Bursa Malaysia rose 10.4%.

A look at the major global geopolitical events in the past shows that investors’ knee-jerk reactions are often short-lived.

During the period when US-led forces attacked Iraq at end-March 2003, overthrowing the Saddam Hussein government, the local bourse remained intact, with the FBM KLCI retreating 0.2% and 0.6% after a week and a month respectively from the attack.

The broader market rebounded after that. The FBM KLCI was 14.9% higher three months after the geopolitical event, and 17.3% and 40.6% higher six months and a year later respectively.

The Malaysian market was down 0.8% in 1Q2003 owing to uncertainties over the possibility of a US-led war against Iraq. US-led forces took control of parts of Baghdad on April 9, 2003. US president George Bush declared on May 1 that major fighting in Iraq was over.

Similarly, the attacks by the militant Islamic terrorist group al-Qaeda against the US on Sept 11, 2001, did not shake the local bourse. The FBM KLCI rose throughout the one-week, one-month, three-month, six-month and one-year periods after the horrifying day in US history.

Over the past week, the FBM KLCI gained 1.7% to close at 1,605.02 points last Thursday.

Amundi Asset Management in a Feb 1 note stated that should Russia-Ukraine tensions escalate, it could have much broader implications on risk assets globally.

“This would be on top of the current pressures relating to ongoing high inflation expectations for 2022, sentiment indicators weakening due to the Omicron variant and central banks turning more hawkish and standing ready to act, as clearly stated by the US Federal Reserve.”

It added that investors with a global multi-asset portfolio should remain neutral in terms of risk allocation, keeping a short-duration stance in fixed income and using hedging strategies for assets that could suffer most in the case of a deteriorating geopolitical situation.

DBS Group Research senior rates strategist Eugene Leow says the interplay of US Fed hike expectations, inflation worries and geopolitical risks around Ukraine are impacting the US Treasury curve.

“First, tensions around Ukraine are dragging down sentiment. Most of this is exhibited by the decline in term premium as investors sought safety. Hence, it renders the US Treasury curve flatter than it otherwise would have been, even after accounting for hike expectations.

“Second, Fed hike expectations have been steadily building since the start of the year and are proving sticky. Using Dec 24 Fed funds futures as a guide, the market still sees the Fed raising rates above 2%. For 2022, the market is still pricing in six to seven hikes. This is in line with our view that conflict around Ukraine is unlikely to derail Fed normalisation. In fact, there are upside risks to inflation and arguably mixed impact on growth if tensions worsen.

“Lastly, inflation expectations have been driven lower over the past few months as the market starts to aggressively factor in Fed hikes.”

The yield on 10-year Treasury notes was down at 2.040% last Wednesday.

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