European markets opened higher today, with the FTSE 100 gaining around 0.75 per cent by 10:30 BST, after a statement on Ukrainian president Petro Poroshenko’s website said the two countries have agreed to a ceasefire following a phone call between him and his Russian counterpart Vladimir Putin.
“The result of a conversation was an agreement on a permanent cease-fire in Donbas. There was a mutual understanding on the steps to promote peace,” it said.
However, the picture was complicated by Putin’s spokesman Dmitry Peskov, who argued that Russia cannot agree to a ceasefire with Ukraine as it’s not involved in the conflict taking part in the east of the country.
Meanwhile, commentators have pointed out that Russia’s conciliatory statements in the past have not always led to de-escalation.
The statement on Poroshenko’s website was then changed to: "Their conversation resulted in agreement on a process for ceasing fire in the Donbass region."
Performance of markets over 2014
Source: FE Analytics
Here, two investors argue whether Russia’s apparent support of Ukrainian separatists will have a meaningful impact on the market if the conflict intensifies once more.
Yes
Rowan Dartington director Guy Stephens says the Ukraine crisis could ultimately lead to a correction markets in coming months unless a lasting solution to the conflict is found.
“It is becoming increasingly clear by the day that president Vladimir Putin started a new strategy to expand Russia’s borders when he annexed Crimea in March. This was possibly a defensive move initially, in response to the West trying to influence the original Ukrainian prime minister to move away from Russia and towards Europe,” Stephens said.
“However, the ease with which president Putin was able to annex Crimea has exposed the vulnerabilities of neighbouring countries and he is exploiting the situation to the full whilst humiliating NATO, whose members have no stomach for military action.”
NATO is set to hold a two-day summit in Wales where the Ukraine conflict is likely to be high on the agenda despite today’s suggestion of a ceasefire.
The EU and US have already hit Russia with a series of sanctions for its support of the separatists but Stephens says Putin’s hold on energy supplies to Europe mean its leaders are wary to being too forceful.
“Statements from leaders that his actions are intolerable and unacceptable are only being backed up by sanctions which will do little to dissuade Mr Putin,” he said.
“However, the US will not stand idly by and allow president Obama to be humiliated - we are potentially witnessing the resumption of a new Cold War relationship with Russia which could last for years. This is not a short-term spat which will resolve itself over time but a situation that could have destroyed any trust for years to come.”
Looking at what could affect markets, Stephens points out that any interruption of Russian gas supplies to Europe will have an economic impact on the region while the risk that the US could go beyond sanctions should an escalation take place means investors should consider a more cautious stance.
He added: “September/October is also often a tumultuous period and this issue could just be the catalyst for some weakness that current buyers stand back from in the short-term, thereby delivering a correction.”
Some managers have already taken steps to “Putin-proof” their portfolios, such as Canaccord Genuity’s Justin Oliver. Oliver has bought an energy fund and a aerospace and defence ETF to benefit from possible heightened tensions.
No
Kleinwort Benson chief investment officer Mouhammed Choukeir, on the other hand, sees no reason to change his risk-on stance as geo-political conflict is likely to have minimal impact on equity markets.
“It is easy to draw the conclusion that one’s asset positioning should be defensive during times of heightened conflict or stress. However, financial history teaches a different lesson: geo-politics rarely impact equity markets over the medium to long term,” he said.
“Geo-political crises, for all their horrific images, real-time press coverage and social angst, simply do not appear to affect markets often.”
Kleinwort Benson’s analysis of 16 serious geo-political crises since 1950 shows the S&P 500 was down 12 months later on only four occasions.
These include the Arab-Israeli war of 1973 and the September 11 attacks.
However, Choukeir points out that the Cuban missile crisis in October 1962 was followed by a one-year gain of 34 per cent in the S&P while a 13 per cent rise came after the Six-Day War in 1967 between Israel and its neighbours.
More recently, the S&P surged 35 per cent in dollar terms over the year after the invasion of Iraq in March 2003.
Performance of S&P 500 after Iraq invasion
Source: FE Analytics
“Geo-political tensions are likely to continue dominating the headlines in the coming months. While they will undoubtedly create jitters in markets in the short run, their impact on medium and longer term performance is likely to be minimal. Unless of course, those conflicts significantly change the course of market fundamentals,” the CIO said.
“Medium and long-term performance is driven by fundamentals rather than geo-political headlines. Market fundamentals such as valuations and continued strong positive momentum point towards further gains in equities, thereby supporting our risk-on stance.”
“We will change our view when the conditions warrant a change: if momentum were to turn negative, if valuations become overly extended and/or sentiment became overly bullish.”
“For now, none of these conditions are on red alert, though they are flashing amber, hence our reduction to risk since the beginning of the year.”
