• Equity indexes declined in February
  • March FED meeting in focus

In February, financial markets have been rocked by the developments in Ukraine. The developed market index (MSCI World TR) in euros declined by 2,7%, the emerging markets index (MSCI EM TR) in euros decreased 3,2%, while the Europe index (MSCI Europe TR) contracted 3% and the Russian market index (MSCI Russia) in euros is down 52,7%.

In January, markets were discounting an increasing probability of faster rate hikes this year, however, the events in Ukraine rippled through financial markets during the second part of February. First of all, news about the war caused a sharp increase in gold and oil prices. Afterwards market participants tried to evaluate a decreasing probability of interest rate hikes and for some time markets rebounded. However, risk appetite soured after few rounds of sanctions on Russia. At first, sanctions were focused on Russian banks and high net worth individuals, but later a ban on purchases of Russian sovereign debt was announced, a number of Russian banks were cut off from the SWIFT payments system, while the country’s central bank was blocked from accessing its foreign reserves. The central bank was forced to introduce capital controls in order to support the local currency and to limit a bank run.  Moreover, the central bank has suspended trading on Moscow Exchange’s stocks and derivatives sections and doubled interest rates to 20%.

February performance in euros

Source: Bloomberg L.P.

In the end of February, Russian financial markets froze and became isolated from the global markets. This situation prompted index providers to make important decisions. For example, MSCI stopped implementing changes for Russian securities and started to consider removing them from indexes. For example, MSCI Emerging market index had approximately 2% dedicated to Russian companies on 25th of February. The rating agency S&P Global Ratings downgraded Russia’s credit rating to BB+. As a result, the country has lost an investment grade rating. In addition, MSCI announced, that Russia and Belarus ESG government ratings have been downgraded to B with a negative outlook, which is the second lowest rating.

Hope of peace emerged as Ukrainian and Russian diplomats gathered for the first round of talks. While no major breakthrough has been achieved, it was agreed to have another meeting in the nearest future. Currently, it is hard to tell, how long this conflict will last or how it will be resolved, but it is clear that it will have long term consequences for Europe and possibly for the rest of the world.

A lot of companies are cutting ties with Russia. For example, BP Plc announced that it will exit its 20% stake in the state‑controlled Rosneft and this could result in a 25 billion USD write‑off. The car maker General Motors said that it has halted shipments to Russia. The company used to export roughly 3000 vehicles a year to Russia. It is also possible, that foreign companies in Russia could face a pushback from the Russian government, which, in extreme cases, could lead to the seizure of assets.

March will be a pivotal moment for the US central bank (FED), due to widespread expectations of a first rate hike. These expectations have somewhat diminished following the sanctions imposed by the US on Russia. Rising oil prices pose a major risk of even higher inflation rates in the US and at the same time the US economy could be negatively affected by worsening trade ties with Russia. 

Actions of the Luminor investment team in managing the risks associated with the situation in Ukraine

Since the beginning of the year, the Luminor Investment management team has been reducing the level of risk, mainly to account for the potential negative effects from the monetary policy tightening. Overall equity allocations have been slightly below neutral, while a part of the equity exposure has been shifted to defensive sectors (utilities, healthcare and energy). Following the events in Ukraine, it was decided to lower the proportion of risky assets further, to 1 underweight. The investment team will continue monitoring the situation, assess possible economic consequences and will act accordingly.



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