The invasion of Ukraine by Russian troops continues. Although attempts are being made to talk between the parties, no one can predict the exact course of events. Russia is also becoming more and more isolated in the international arena and is hit by numerous sanctions.

As a result, there is natural uncertainty in world markets and among investors. How to protect your wallet in the current situation? What is worth investing in now? Which stocks are profitable and which can be risky? In this article, we present the analysts and investors’ perspective on the current situation. We are analyzing some of the potential effects of the war in Ukraine and looking at actions that may offer interesting investment opportunities.

Does the conflict in Ukraine threaten the price of crude oil and natural gas?

Are we at risk of rising crude oil and natural gas prices? In the current situation, there are even scenarios in which Russia could stop supplying Europe with these raw materials. The situation is very precarious. As Russia produces up to 12% of the world’s crude oil and 17% of natural gas, the risk may seem high. If the distribution of gas and oil from Russia is stopped (or reduced), prices in Europe can be expected to rise.

JPMorgan Chase analyst Michael Cembalest reports that as much as 40% of natural gas and 27% of oil resources come from Russia. On the other hand, the United States imports only 1-3% of its oil and gas from Russia. The role of Ukraine in agriculture is also important. The conflict may devastate this country for a long time, which carries the risk for Europe in the form of reduced imports of soft raw materials (especially cereals).

The consequences of the sanctions and Russia being cut off from the SWIFT system?

The US-led Western states imposed very tough sanctions on Russia; one of the most important is Russia’s cut off from the SWIFT financial system. Selected Russian banks are therefore unable to carry out most international transactions, mainly with the West. This step will have a significant impact on Russia; we can already observe a dramatic drop in the exchange rate of the Russian ruble. However, Europe will also pay for this move. Although these sanctions will hurt Russia in the first place, they may also have a negative effect on the Western world.

As much as 70% of natural gas from Russia flows directly to Europe, and cutting Russia off from SWIFT will probably lead to a significant reduction in their sales. This appears to force Russia to divert most of its trade to China, which may benefit from it.

China created its own financial system CIPS (Cross-Border Interbank Payment System) in 2015. This was to increase the yuan turnover in the international market. This financial system is used by 30 banks from Japan, 23 banks from Russia and another 31 banks from African countries. CIPS remains under the auspices of People’s Bank of China (PBOC). It is by no means the only alternative to SWIFT.

Russia itself uses its billing system called SPFS (System for Transfer of Financial Messages). These two financial systems will also help Russia to function under sanctions. By implementing the Chinese CIPS system, Russia has deepened mutual relations, and in 2020 17.5% of transactions between the two countries were carried out in yuan.

Therefore, we can only expect a strengthening of Chinese banks and Chinese equities, as only they will be able to make transactions with Russia in yuan and rubles. The largest Chinese banks are: Industrial & Commercial Bank of China (ICBC), Bank of China (BOC) and Agricultural Bank of China (ABC bank).

The conflict in Ukraine and the sanctions introduced are therefore likely to lead to a short-term strengthening of Chinese banks and an increase in commodity prices, as well as inflation in the medium term. However, even increased trade with China will not be able to prevent the problems that clearly await the Russian economy.

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Mark Mobius and investments in gold and Asian equities

Mark Mobius, an investor and founder of Mobius Capital Partners LL, commented on the current situation in Ukraine, stating that the rapidly rising oil price will undoubtedly increase the inflationary pressure in many countries dependent on oil supplies from Russia. In his opinion, investing in gold with the current uncertainty in the markets may be a good option.

He also added that it is worth focusing on markets that will not be directly affected by the sanctions imposed and the consequences of the conflict in Ukraine. For example, he considered China, Vietnam and Thailand to be a safe haven. However, he immediately stressed that due to the dynamics of the whole situation and rising interest rates, investors should be particularly careful.

Fears of hacker attacks as an opportunity for cybersecurity action?

Dan Ives of investment company Wedbush says the invasion of Ukraine could present an interesting opportunity for cybersecurity companies. The growing threat of hacker attacks increases the need for systems that provide sufficient protection against cyber attacks.

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Dan Ives adds that these kinds of geopolitical crises can be used to buy stocks that are being resold massively due to panic in the market. He is referring in particular to the technology sector and mentions, for example, shares in Microsoft, Aple, Oracle, Adobe and Salesforce.

The crisis in Russia and the results of the S&P 5000 index

Analysts also looked at the various conflicts and developments that Russia was causing to uncertainty and shake the financial markets. 6 such situations can be seen below. In the case of all the above-mentioned events (except for the conflict in Georgia in 2008), the S&P 500 index recorded an increase six months after the beginning of the crisis. It should be noted, however, that the development of that time in no way guarantees future movements or results. Each conflict has its own specific characteristics and, of course, other geopolitical and macroeconomic factors must also be taken into account.

Development of the S&P 500 index in response to the Russian crises from 1979 to 2014. Source: JP Morgan (02/28/2022): JP Morgan (02/28/2022)

It is difficult to predict what the political and economic consequences of the war in Ukraine will be, as well as its duration or course. Particular caution is therefore advised. It cannot be ruled out that the conflict will spread somehow and that many more countries will get involved. At this point, absolutely nothing is certain.

According to JPMorgan analysts, the war in Ukraine in the short term will bring increased volatility in the markets. Due to the low exposure of US companies to Russia, however, mainly indirect risk is important. For example, the economy is slowing due to rising spending on consumer goods caused by rising oil and food prices. Other risks include the effects of sanctions, breach of supply chains and hacker attacks.

However, according to them, the key risks in the long term still remain the tightening of monetary policy by central banks and inflation.

For which stocks the present situation could be advantageous?

The stock selection is based on a recent JPMorgan Chase study and focuses mainly on raw materials (energy and materials) and the aerospace and defense industries.

It should be borne in mind that this is by no means investment advice and investors should be very careful now, as there is a lot of uncertainty in the financial markets due to the ongoing conflict and it is impossible to predict any political and economic consequences of this situation. So trade based on your own strategy and established risks.

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Sources used:

REUTERS STAFF. Chinese banks urged to switch away from SWIFT as US sanctions loom. REUTERS [online]. Vydáno 29/07/2020 [cit. 28.2.2022]. Dostupné at: https://www.reuters.com/article/us-china-banks-usa-sanctions-idUSKCN24U0SN

REUTERS STAFF. Factbox: What is China´s onshore yuan clearing ad settlement systém CIPS ?. REUTERS [online]. Published on 2/28/2022 [cit. 28.2.2022]. Available here: https://www.reuters.com/markets/europe/what-is-chinas-onshore-yuan-clearing-settlement-system-cips-2022-02-28/

MINT STAFF. Unlike Russia, China can bypass SWIFT to escape ambit of US power. MINT [online]. Published on 2/28/2022 [cit. 28.2.2022]. Available here: https://www.livemint.com/news/world/unlike-russia-china-can-bypass-swift-to-escape-ambit-of-us-power-11646006040962.html

RAFFERTY, R. The 5 Biggest Banks in China. Statrys [online].[cit. 28.2.2022]. Available here: https://statrys.com/blog/biggest-banks-china

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