Mike Dolan

LONDON, (Reuters) – The global investor consensus is being hampered by the new year and visibility has become a problem.

While Russia and Ukraine tensions continue to simmer, large bets were placed on stocks in the emerging market and the euro zone. This is similar to the 2022 hot tip: the overly bullish U.S. dollars view.

It seemed simple to avoid Treasury bonds, but it is now being considered a complex task.

Precious metals, energy and commodities have all performed as expected, mostly because of obvious geopolitical reasons.

Asset managers have advised that you switch to more cyclical, less-valued ‘value’ stocks. However, the dramatic flattening U.S. Treasury yield curve is one of the best trades for the year. It doesn’t bode well for future growth.

The number of questions is increasing faster than the answers.

What will happen to the central banks’ ability to tighten monetary markets in the face of the growing military tension in Eastern Europe? What point will soaring energy prices crimp demand and spur inflation?

It’s still early for all. Even though the year is only two months old, volatility in pricing does not mean you won’t reach your full-year investment goals.

The number crunch by Goldman Sachs, NYSE: this week indicated that a significant portion of Ukraine’s crisis might already have been discounted.

Paul Donovan, UBS’ economist, noted this week that “Markets don’t price in political risks properly.”

Investors should be ready to put down their hatches for clarity when the expectations surrounding the U.S. Federal Reserve’s crucial meeting and the European Central Bank’s next month are ebbing and flowin’ in tandem with rising oil prices and increasing risk aversion.

(Graphic: Major assets so far this year, https://fingfx.thomsonreuters.com/gfx/mkt/akvezxgokpr/One.PNG)

BATTENED HATCHES

Deutsche Bank (DE) Wall St equity sales around the geopolitical events of the past century are on average deep at almost 6 percent. It takes only six weeks for prior pricing to recover. The strategists acknowledge that the current economic climate will dictate the direction of the market.

Yerlan Syzdykov, Amundi’s Emerging Markets Head, believes there could be some opportunities in the worst-affected markets – but that investors might just gravitate towards safe havens until they are more clear about the security situation.

JPMorgan (NYSE)’s emerging debt team stated the crisis was in a “new stage” and advised that they pare back existing positions as well as removing all Russia- or Ukraine-related paper.

Clients were informed that “The crisis has now transformed from a background danger to a key market driver in the coming weeks.” They stated that there are more durable and fundamental implications for the markets due to higher energy prices.

(Graphic: Uncertainty vs euro zone and emerging market stocks, https://fingfx.thomsonreuters.com/gfx/mkt/byvrjeoqgve/Two.PNG)

CHRISTMAS HOME

Then, just take the remainder of the quarter.

Deutsche’s research relies on dating past geopolitical events to single events. This standoff might struggle to pinpoint that moment.

The markets may be facing more headline risks than usual as there is no indication of when Russia or whether it will invade Ukraine in its entirety.

Additionally, Russia’s actions have made it one of the most important economic background concerns.

Many will be interested to know if China sees the escalating ties between Moscow, Beijing as an opportunity to confront the West over its regional problems – something that companies and global fund managers more closely connected to China might see as a bigger disruption to their markets.

During the summit between Vladimir Putin (President Xi Jinping) and China, China supported Russia’s demand for an end of NATO expansion. Russia opposed independence for Taiwan.

These scenarios are not good for the major consensus trades, including those in Emerging Market and European stocks.

As we move into warmer seasons in the Northern Hemisphere and Nordstream 2 is now approved, talk of an energy crisis for the euro zone may seem exaggerated.

However, Barclays (LON.) Tuesday’s observation that the current low flows from Russia could still cause euro gas storage to remain at extremely low levels following a milder winter. If flows are weak during the summer, this could lead to a crisis that extends into 2023. The volatility and high prices are expected to continue.”

For emerging markets, Russia’s more stringent sanctions, tension in East Europe and new penalties for large energy importers like Turkey add to the turmoil in an already turbulent year marked by increasing interest rates, high inflation, and higher prices.

The unknowns around China’s next domestic and international political shift could be a significant swing factor for large emerging equity indices which are dominated Chinese stocks.

According to the February Bank of America (NYSE 🙂 fund manager survey, the most significant net shift in position over the month was toward emerging markets. This latest shock will be painful, as MSCI’s emerging markets equity index’s peak-to-trough decline over the last year is now at 17.5%. It’s also flirting with -20% territory.

The editor-at-large of finance and markets for Reuters News is the author. These views are solely his.

(by Mike Dolan. Twitter (NYSE::): @reutersMikeD. Editing by Gareth Jones