Putin troops in East Ukraine rattles markets as HSBC flags HK covid curb disquiet

Putin's order to put troops in breakaway regions of Eastern Ukraine has led to heightened market fears that war will be increasingly impossible to avoid, as HBSC posts almost double profits yet signalling concern in recruiting top talent to Hong Kong when it has such strict pandemic curbs. 

Susannah Streeter, senior investment and market analyst, Hargreaves Lansdown said: "The ominous turn of events has escalated the already highly tense situation, with chances of a diplomatic breakthrough fading away and the fresh sanctions set to hit Moscow.

"A barrel of Brent crude leapt 2.3% up above $97 dollars, its highest level since September 2014 amid nervousness of a constraint of supply from Russia, at a time of high global demand and lower inventories elsewhere."

While Jason Hollands, managing director at investing platform Bestinvest, said in further reaction: "While it is understandable that investors will be spooked by a potential conflict in Europe, it can be unwise we to take knee-jerk decisions around long-term investments based on short-term news headlines. 

"Nathan Rothschild, one of the founders of the banking dynasty, is alleged to have opined ‘Buy on the sound of cannons, sell on the sound of trumpets', having made a fortune during the Napoleonic war.

"His words are often taken as advice to scoop up investments that others sell in a panic. However, the tale is a little more nuanced, since Rothchild's network of agents learned of the Duke of Wellington's victory at the Battle of Waterloo in 1815 ahead of other investors, giving him an information advantage that would not stand up in today's digital world of 24-hour news."   

Hollands continued: "While buying when markets experience sharp sell-offs can make sense, trying to second guess when market declines have bottomed out is near impossible, and therefore a combination of not panicking, together with progressively adding to portfolios in small bites following falls is wiser than taking a cavalier approach. 

"Clearly the Ukrainian and Russian economies are most exposed to the implications of crisis but most investors will have little, if any, exposure to Russian or Ukrainian investments. To put this in context Russian shares constitute a mere 2.85% of the MSCI Emerging Markets Index. Russia's balance sheet is stronger now that it was at the time of the seizure of Crimea in 2014, with lower external debt, and therefore is arguably less vulnerable to sanctions than it was then.

"Among the major European economies, Germany has the greatest trade ties with Russia, but these still only account for 2% of German exports. The main implication from the crisis is therefore the potential for a further surge in energy prices, which would add to inflationary pressures."

Hollands further said: "Since the global financial crisis, investors have got used to a playbook where central banks ride to the rescue during crisis, cutting interest rates and creating new money to flood the markets with liquidity.

"However, that cannot be relied upon now as central banks have their credibility on the line in terms of taming inflation. Therefore the prospect of inflation and rising borrowing costs look set to remain key considerations for investors, which creates a challenging backdrop for ‘growth' sectors such as technology stocks and markets like the US where they are a major component. 

"In contrast, banks are beneficiaries of rising interest rates and energy and commodities are key components of rising inflation. In this respect, the make-up of the UK stock market - which has sizeable exposure to financials, energy and mining stocks - should continue to prove more resilient than the US with has high weightings to ‘growth' sectors that are likely to prove more vulnerable to rising borrowing costs."

Kelly Chung, senior fund manager at Value Partners, one of the largest independent asset managers in Hong Kong, also weighed in with his view: "Tensions between Russia and Ukraine escalated following Russian President Vladimir Putin's recognition of self-declared Donetsk and Luhansk People's Republics (DPR and LPR) in eastern Ukraine as independent states. These regions are Russian-backed separatist regions, which have been fighting Ukrainian forces since 2014. Just hours following the declaration, Putin ordered troops into the two regions. While the Kremlin calls this a "peacekeeping" mission, the move has raised worries that Russia would want to wage war with Ukraine.

"The escalating tensions between the two countries did not bode well to markets, as it added to investor concerns on the persistently high inflation in the US and a more hawkish Fed. Investors are already pricing in six to seven rate hikes this year, with the first expected to happen in March. In addition, the Fed's plan of trimming its balance sheet also remains to be a major uncertainty in the market. So far, the Fed has not yet indicated the magnitude and the pace of balance sheet normalization, and more certainty to this is expected to come in the next FOMC meeting in March.

"While we view that Russia will not wage war with Ukraine, we expect that tensions may further escalate, which could exacerbate inflationary pressures. With both Russia and Ukraine being major exporters of oil and other commodity products, the tensions may cause more bottlenecks in the supply chain and push up energy and food prices. In addition, any response from western economies, especially the US, would likely be trade sanctions, which should also impact oil and food prices."
 
Chung continued: "We expect that tensions between the two countries will prolong longer, and the market is still yet to price in this geopolitical uncertainty. However, we view that the market impact will not last too long (historically direct market impact from geopolitical tension last from three weeks to three months). As more important market drivers associated with the tensions are inflation-related, investors will eventually focus back on the Fed, particularly on having a clearer picture of its balance sheet normalization.

"Ten-year US Treasury yields have risen since yesterday as investors are buying back long duration treasuries as a flight to safety in response to the ongoing tensions. On the other hand, we are seeing less movement in the short-end, causing the yield curve to further flatten, which also arise from the concern of economic slowdown.
 
"In the equities market, the market has been rotating from growth to value stocks amid the faster-than-expected hikes of the Fed. We view that the rotation will last at least up until the end of the first half. While the growth-value valuation gap has started to narrow, it is still above the historical average."
 
"While markets globally have been impacted by the geopolitical tensions and ongoing inflationary concerns in the US, we view that our China- and Asia-focused portfolios should be in a better position."
 
In China, the country has been counter-cyclical with its monetary policies., Chung further said: "While most developed markets are trying to control inflation, inflation in China has been going down due to weakening demand, leaving it more room to provide stimulus in the economy. In fact, following its shift to a pro-growth stance in December, the government has started monetary easing, which should help lift investor confidence and help the economy to achieve stable growth for the rest of the year.

"For example, following the RRR cut in December, the interest rate for the medium-term lending facility (MLF) operation has been lowered by 10 bps, and the one-year and five-year Chinese loan market quoted rates (LPR) have been lowered by 10 and 5 bps, respectively. The reduction of the 5-year LPR, which is the benchmark for mortgage interest rates, is the first cut since April 2020. That said, investors continue to be concerned about regulatory risks. However, we view that regulatory uncertainty has peaked and investors will not be as surprised as before.
 
"Outside of China, inflation is also more under control, including Taiwan and most of Southeast Asia. In these markets, we are not seeing central banks in a hurry to increase interest rates. The only exception is South Korea, which started to increase interest rates last year. Meanwhile, most markets in Southeast Asia are also looking past the Omicron variant, as most have continued on their reopening, which should help the market catch up.
 
"We also believe that the Russia-Ukraine tensions will have relatively less impact on the region compared to the west. While the tensions may further drive up inflation, this should benefit resource- and export-heavy Asia, especially Malaysia and Indonesia."

HSBC concerns 

Elsewhere, HSBC said Hong Kong's strict curbs on travel and social interaction were impacting the economy and could hinder staff recruitment there.

"The evolving Covid-19 restrictions in Hong Kong, including travel, public gathering and social distancing restrictions, are impacting the Hong Kong economy, and may affect the ability to attract and retain staff," it said on 22 February.

HSBC has put pandemic bad loans behind it and profits are set to pour in at a much greater rate than initially forecast. 

It already almost doubled pre-tax profits in Q4 with borrowing rising sharply as business and consumer confidence returned. 

But Streeter said China's property woes clearly remain a cause for concern for the Asia focused bank. 

"The market is having a less than savoury response to higher than expected impairment charges, a lot of which relates to uncertainty in the Chinese commercial real estate sector. This is certainly something to be keeping an eye on. 

"The Goldilocks dilemma is also evident in this update, as HSBC needs inflation to tick up enough to prompt rising rates, but not be so hot it makes customers nervous about taking on new borrowing, which could dent its loans business. 

"The group's enormous exposure to Asia also means recent rate hikes in other regions don't have as much of a bearing on these results. With some speculation Asian economies could drag their heels on increasing rates, that's unlikely to change. However, that lower base also means there's more opportunity for growth in the future."

She added that for now, many consumers are shrugging off higher prices and the urge to spend has helped International Hotels Group.

"Even though international travel has still been more limited with the rampaging effect of Omicron, a surge in staycations in the US has helped the Marriott owner beat expectations. 

"What has also boosted the numbers is that tourists are opting to stay in resorts rather than cut price breaks, clearly keen to reward themselves after the frustration of missed holidays during the pandemic. 

"Demand has picked up strongly with revenues per room back at 83% of pre-pandemic levels in the last quarter, with vaccinations now providing a big dose of confidence for overseas trips, with many customers likely to be spending savings piled up during the pandemic. 

She further said; "But as the cost of living squeeze intensifies, there still may be challenges ahead, and the group won't be able to have business travel to fall back on as much as pre-pandemic days. Corporate travel is likely to stay more subdued, given we have become so used to the ease of virtual meetings, and companies are now more conscious about their environmental footprint.''