Market Commentary: Russia-Ukraine War & Energy Prices

25 February 2022

Freddy Lim, co-founder and CIO of StashAway, and Stephanie Leung, Group Deputy CIO of StashAway, discuss the Russia-Ukraine war and the recent rumours coming out of China.

Watch the video, or read on to find out the key points from our Market Commentary. 

If you've only got 30 seconds, here's what you need to know: 

  • Governments have reacted to the Russia-Ukraine war with a tranche of financial sanctions and have indicated that more sanctions are to come. 

  • The US Dollar-Russian equity index has fallen about 35% from its recent peak, and financial markets have priced in rising energy costs.

  • Over in China, some investors fear that recent regulations could hamper the country's economic growth. We clarify what's going on and why investors should focus on China's loosening monetary environment.

On the Russia-Ukraine war: “The world is more vulnerable than in the past case with Crimea because inflation and energy prices are a lot higher.”

Governments have reacted to the Russia-Ukraine war with a tranche of financial sanctions and have indicated that more sanctions may follow. We take a look at how the market has priced in the risks arising from the conflict through 2 different asset classes:

Russian equities, as indicated through the US Dollar-Russian equity index 

The US Dollar-Russian equity index has fallen by about 35% from its recent peak, compared to the 43% drop during the market correction in 2020. And if we look back to 2014, when Russia annexed Crimea and triggered a round of sanctions, the Russian equity market also fell by approximately 42%. Based on this information, it appears that the market has priced in a significant amount of risk - though not as much as in 2014's annexation of Crimea or 2020's market correction.

The US Dollar-Russian Equity Index

Energy, as indicated through Brent crude oil prices

If you look at the Brent crude oil prices, which is a major benchmark price for oil purchases worldwide, you’ll see that the prices have hiked above $90 USD. Another way we've gauged oil price is through the calendar spread of oil price futures by comparing 1-month futures and 12-month expiring futures. From the graph below, the spread is indicating that it is overvalued in the short term, trading at about 12% to 13%, the highest it’s been in the past 10 years. This premium indicates that a lot of concern has been already priced into oil.

These dynamics add to concerns around inflation and a tightening US economy. And, the sanctions in response to the Russia-Ukraine war could push energy prices even higher.

Relationship of oil price and oil futures spread

On China’s recent rumours: “It's important to look at facts… and China’s central bank remains one of the only major central banks to be on a loosening path.”

Over in China, some investors fear that recent regulations could hamper the country's economic growth. We clarify what's going on and why investors should focus on China's loosening monetary environment. 

Rumour 1: China will stop issuing new game licences in 2022

This rumour has been denied by a Tencent spokesperson. Moreover, the post that had originally made this claim was, in fact, an old post from last year. 

Rumour 2: China’s government has asked food delivery platforms to lower their fees everywhere

When China's government asked food delivery giant Meituan to cut its delivery fees this month, the company's stock price tumbled. However, the headlines didn't sufficiently cover that this regulation only applied in areas affected by the pandemic lockdown. Moreover, China's government will likely soon relax COVID policies, effectively relaxing this regulation.

Fact: China’s monetary policies are on a loosening path

Financial markets are pricing in rate hikes across the US and other developed economies. But it's just the opposite in China: the People's Bank Bank of China remains one of the major central banks on a loosening path, signalling growth for the country's economy.

Our portfolios have been prepared for inflationary momentum and asset class valuations since our last reoptimisation

As a result, our portfolios’ performance has been very flat relative to where the major indices are. For example, our highest-risk portfolio, which is expected to be the most sensitive, is only down by approximately -2.2% for the year in USD terms. That’s compared to the S&P 500, which is down by about -11.35% as of 23 February 2022.

Read more about our recent reoptimisation → 


Freddy | 00:01

Welcome everyone to StashAway's Market Commentary and I have with me today a great pleasure of mine to have Stephanie, my deputy CIO, here with us in this channel as well. Hey Stephanie, how are you?

Stephanie | 00:13

Hi, Freddy. Hi everyone. It's very, very cold in Hong Kong.

Freddy | 00:17 

That's why you look warm.

Stephanie | 00:20


Freddy | 00:23

Well, as you know, a lot has happened in the markets, actually since the beginning of the year. The correction started from 3rd of January when S&P peaked, and the latest concern in the market was the latest action of Russia sending troops to Ukraine and that really created tensions. They formally recognised separatist groups in Ukraine itself. That's seen as provocative and Europe is concerned, NATO is concerned, and the US is concerned. So Stephanie, let me start with you, right? What do you think? The market has clearly reacted, but what do you think about this price reaction versus the event?

Stephanie | 01:10

Yeah, of course. I mean, things are kind of quite fluid, and we're seeing headline news every day. It seems like financial sanctions are the first steps, but potentially, I mean, Biden and the European Union have also signified that there could be further steps. There are some fears that a war is going to break out as well. So I think it's prudent to maybe take a look at what the financial markets have already priced because financial markets always just move ahead and trade on expectations of things. So to look at, to kind of get a gauge of how markets are pricing in the risk in Ukraine and Russia, I mean, we can take a look at 2 very, very direct impacts at asset classes. Like the first one is obviously Russian equities, and you have to look at it from a US Dollar point of view because I think the Ruble, the currency, is also affecting how foreigners are actually pricing Russian assets. If we look at that, actually the US Dollar-Russian equity index has fallen about 35% from its recent peak. That compares to a 43% drop in 2020. And if we look back further in 2014, when Russia basically had annexed Crimea and triggered a round of sanctions, back then, the Russian equity market also fell by around 42%. So I think looking at this, it seems like the market has priced in quite a bit of risk. But I mean, not as much as obviously in 2014 or the correction in 2020.

Freddy | 02:46 

To put it into perspective, Stephanie, it seems like the world is more vulnerable than in the past case with Crimea, because inflation is a lot higher and energy prices are higher. So we sort of see it as Russia holding Europe in particular hostage because of energy. Is there some truth to it, in your opinion?

Stephanie | 03:10

Yeah, I think the market is also pricing that in as well, because obviously oil prices or oil is another asset class that's been pushed up higher because of concern about exactly what Freddy has been talking about. So again, I mean, we can look at some interesting data about the energy prices to get a gauge of how much risk is priced in. And to look at this of course, from a headline point of view, the Brent prices have gone above $90. I think the latest is trading around $93. The other way to gauge is actually also to look at what we call the calendar spread of oil price futures. So you take the front month future and the 12th month forward future, typically in times where the market is very concerned about near-term supply, the front month would trade at a premium to the 12th month - to the forward month. And if you take the difference, then you can kind of get a gauge of how nervous the market is. Right now, that premium is trading at around 12% to 13%, which has been a historical high in recent years, so a lot of concern has been priced into oil.

Freddy | 04:22 

So putting the market pricing, so what you're saying is that the market has priced in a lot of this concern. And if we put it in the broader perspective, just in case…

Stephanie | 04:32


Freddy | 04:33

If they go to war, but it's just Russia and Ukraine, it's isolated -  the rest of the world, NATO, Europe, and the US put on sanction pressures only to exert pressure to change - that's an isolated scenario. It becomes like, it's not going to be a contagion. It's actually quite isolated. But of course if we go to multilateral warfare then it becomes a lot messier, and energy prices can certainly go up. In your opinion, what's your base case scenario?

Stephanie | 05:08

Basically if we looked at sanctions, so if you follow the 2014 playbook, both Europe and the US applied sanctions to Russian individuals and also companies that are closely related to Putin. However, they refrained from broader sanctions like the import of oil and energy precisely because they know the economic impact of this. So it's a bit of game theory because right now the US is also facing a big inflation problem, which we have been highlighting for months. And if they imply some kind of tighter sanctions that may push energy prices higher and that may have impacts on the US economy itself. So it's a difficult game to play. So of course, here we don't have the crystal ball, but we rely on a lot of data to just help us guide our portfolio decisions. But it looks like the market is very worried and added to that, there's also concern about the Fed tightening. So the S&P has been in a correction mode. And if you look at the latest number, it's fallen close to 14% from its peak. Freddy, what's your view on that? And also, I guess, how are StashAway's portfolios positioned for that?

Freddy | 06:29

Well, you know, since our reoptimisation, we're preparing for valuations and inflation momentum, as you knew early in the year. But as it turns out, our portfolio has been very, very flat relative to where the major indices are. As an example, the highest risk portfolio, which is expected to be the most sensitive, as of the latest estimate, fresh estimates, probably down around -2.2% for the year in USD terms. But as you know, as you just mentioned, the S&P is down. As of last night, it's -11.35%. But in Asia time, there's another extra couple of points down. So it's nearly -14%, as Stephanie just mentioned. So that's quite a big gap of outperformance here. Again, it goes to show the importance of being diversified but saying it is easy - it's how do you source diversification? So in particular, we sourced diversification by looking at the valuations of assets, looking at economic factors, and trying to balance the portfolio's exposure to all these dimensions. So this is coming into play right now. And of course, we hope the markets will stabilise soon. But to our clients, it has been very resilient - our portfolio across the board. So, Stephanie, in China, there's also quite a few things going on and perhaps we can work our clients through the latest scoop in the landscape there.

Stephanie | 08:03

Yeah, a lot of news and rumours flying around as well. Earlier this week, some of the big cuts in China interest rates have been hit because of a rumour that China will stop issuing new game licenses in 2022, which was very, very, I guess, outright denied by a Tencent spokesperson. And also the tweet or the internet post referred to was actually a very, very old post from last year. So again, markets are confused at these junctures. But it's important to stick to facts and Freddy.

Freddy | 08:40

I think there's also a similar misunderstanding with this Meituan situation. As I remember correctly, the governments were asking food delivery platforms to lower their fees. However, what's missing in the headline was only in areas affected by the pandemic in the lockdown because of the zero-COVID policy. And so, it's not nationwide. And so there's another misunderstanding there. But if I go to the macro level, you also will see that China has just completed hosting the Winter Olympics. It's very likely the zero-COVID policy is going to be loosened or even removed. So this delivery fee cap is essentially designed to share the burden for affected areas. But with this policy likely to go away after the Winter Olympics, it's also likely that this would not really be a material influence on, say, Meituan's bottom line. So this is yet again another spin that's been happening in the rumour mill, or it's widely misunderstood?

Stephanie | 09:52 

Yeah, exactly. It's important to look at facts and then also the other fact that we've been referring to is the central bank policy divergence. The market is now pricing in more than 5 times rate hikes for the US - other developed central banks are also set to tighten. And I mean, China, as we've mentioned before, remains one of the only major central banks to be on a loosening path. So that gives the portfolio diversification benefits, which we've been stressing throughout the years. With that, thank you Freddy for your very, very insightful sharing. And as always at StashAway, we have a whole host of very informative webinars lined up for all of you. So this month, actually, we have She Invests, which is a great, great initiative leading up to International Women's Day. On March 1st, we have a very interesting webinar with Satoshi Women and the topic is Investing in Crypto and NFTs. That would be March 1st. On March 8th, the week after, we have Investing in Female Leaders. And last but not least, we also have an interesting partnership collaboration with VinoVest on March 5th on Diversifying Your Portfolio Through Investing in Wine. So please sign up and dial into these very interesting webinars. Thank you very much, and you all have a great week.

Stephanie and Freddy, StashAway Investment Office

Freddy Lim and Stephanie Leung

CIO Office

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