Central bank tightening and slowing growth loom as larger long-term threats for equities, according to strategists on both sides of the Atlantic.
Tensions in Ukraine have markets on edge. Stocks are swinging, oil is closing in on $100 a barrel and uncertainty looms over investors big and small.
But it’s more of a short-term headache than a long-term drag. That’s the view of analysts on both sides of the Atlantic trying to discern what the geopolitical crisis means for investor portfolios in the wake of Russia recognizing two self-proclaimed republics in eastern Ukraine.
Tom Essaye, a former Merrill Lynch trader who founded “The Sevens Report” newsletter, sees the conflict dominating near-term headlines. But he doesn’t expect it to dictate market moves in the long or even medium term. Instead, the most important factors “remain Fed tightening and economic growth,” he wrote.
JPMorgan strategists led by Dubravko Lakos-Bujas were of a similar mind in their recent note to clients, citing the larger risk of tightening monetary policy for equities and noting that Russia-Ukraine tensions are a low earnings risk for U.S. corporates.
“But an energy price shock amidst an aggressive central bank pivot focused on inflation could further dampen investor sentiment and growth outlook,” they wrote.
In the U.K., Bloomberg Intelligence equities strategist Tim Craighead wrote that European stocks face limited risk, “unless Russian energy supplies are cut.” The crisis might “shuffle the leader board temporarily” in terms of European equities, but Craighead noted that the market seems to be more focused on rising inflation, elevated margins and central bank tightening.
Still, Steve Clayton, who manages HL Select Funds at Hargreaves Lansdown in the U.K., noted that the crisis won’t be over in a blip.
“Russian troops have not massed along the Ukrainian border in order to hold a cake sale,” he wrote in a note on Tuesday. “However this unfolds, tensions and uncertainties are likely to run hot for some time to come. The market will not like any escalation, nor will it trust any settlement between the parties unless accompanied by a rapid demobilization of Russian forces around Ukraine.”
Clayton sees U.S. Treasuries and Japanese government bonds as potential beneficiaries as investors seek safe havens. Given the nature of the conflict, he also points to defense stocks such as Bae Systems Plc as possible destinations, given that “European politicians are unlikely to urge for lower defense spending while the Russian bear is growling angrily.”