Investment Insights Podcast – Unrest in Ukraine and Investment Implications

Stuart Quint, Investment Insights PodcastStuart P. Quint, CFA, Senior Investment Manager and International Strategist

Stuart joins us this week to share some comments on the developing situation in Ukraine and its impact on investors.  Click the play button below to listen in to his podcast, or read a summarized version of his thoughts below.

Podcast recorded March 3, 2014:

Ukraine’s struggles are overwhelming. Political, economic, and now military challenges confront the country. Politically and militarily speaking, the U.S. and the European Union (EU) have few tools at this time and modest willpower to oppose Russian intentions in Ukraine. And given that the ruling government is merely a caretaker for the May elections, it seems unlikely there will be a bailout package offered by the International Money Fund (IMF) any time soon. Default on existing international and local obligations appears likely in the near term.

Russia is not without its own constraints, though, as the Russian economy is directly tied to Europe. Three out of every four dollars of foreign direct investment in Russia come from Europe.[1]  The EU also remains Russia’s most important trading partner with 55% of Russian exports destined for Europe.[2]

Let’s take a look at the potential scenarios: (1) Russian annexation of the Crimea, (2) negotiated settlement with later elections that would most likely bring about a grand coalition government, probably with leanings toward Moscow, and (3) military escalation (civil war, Russian forces occupy eastern Ukraine, either of which results in a smaller Ukraine or outright disintegration as a sovereign state).

So what investment implications might this have? (1) The near term is helpful for fixed income, with commodities benefiting from any disruption of supply (oil, gas) and flight to safety (gold), and (2) negative impact most of all for European (Russia supplies 30% of European gas supply[3]) and emerging markets (mainly Russia, but also other markets with the need to import capital could suffer from currency weakness and higher interest rates demanded by investors).

A negotiated settlement involving recognition of Russian claims in exchange for a roadmap to stabilize the rest of Ukraine would reverse many of these trends.  Indeed, a similar situation occurred when Russia invaded Georgia in August 2008, but the crisis in Ukraine has potentially more serious implications given its proximity to Western Europe and that it carries a large population of over 45 million people.[4]

The views expressed are those of Brinker Capital and are for informational purposes only. Holdings are subject to change.

Growth Fears Weigh On Shares

Joe Preisser

The rally in global equities, which has carried share prices to heights unreached since 2008, stalled last week as the marketplace struggled to evaluate the current risks facing the world economy.  Stocks listed from Europe to the United States slipped as concerns of a slowdown in global growth were drawn into focus.

The selling arrived in the wake of the release of a dour assessment of the world’s economy by the International Monetary Fund (IMF) last  Monday and accelerated following a disappointing start to corporate earnings season.  Citing potential problems on both sides of the Atlantic, the IMF lowered its projection for the expansion of global growth to 3.3% for this year, and 3.6% for 2013 (Bloomberg News).   The International Monetary Fund specifically highlighted the lingering effects of the European sovereign debt crisis, as well as the political gridlock in the United States, as risks that hold the potential to destabilize global financial markets (New York Times).  In a reflection of the difficulties created by the lack of a substantive policy response by the Spanish Government to the current rash of problems confronting the country, Standard & Poor’s on Wednesday lowered the nation’s sovereign debt rating  two notches to BBB- and downgraded their outlook to negative.

Earnings season saw it’s unofficial start last week as Aluminum manufacturing giant, Alcoa Inc.* reported results for the third quarter, which exceeded analysts’ estimates.  Although the company’s revenue and per-share numbers were better than expected, a drop in their forecast of global demand for the heavily used industrial metal sent its stock price markedly lower last Wednesday.  Following on the heels of Alcoa’s disappointing comments, the engine manufacturer, Cummins Inc. declared that it was lowering its profit projections for the remainder of the year as a result of waning demand (Wall Street Journal).  The outlook for the global economy offered by these two manufacturing behemoths highlights the challenges currently facing investors, as they struggle to weigh the risks of an economic deceleration against the coordinated efforts of several of the world’s most powerful Central Banks to maintain expansion.

*Shown for illustrative purposes only.  This is not a security holding of Brinker Capital.