What is Happening in Ukraine?
Tensions have been high between Russia and Ukraine since long before the 2014 annexation of Crimea, underpinning a tumultuous history between the two regions. Accusations of an improving alliance between Ukraine and the Western world have exacerbated these tensions. These hostilities have considerably escalated in recent months, intensified by the amassment of Russian troops along the Eastern Ukrainian border. February’s invasion of Ukraine has sparked global outrage and protest, triggering a barrage of sanctions applied to Russian businesses and individuals, most notably their expulsion from global banking system SWIFT.
As international/Russian economic relations sever whilst the conflict deepens, the Russian central bank has been forced to respond in an attempt to combat the impact of Western sanctions. The Russian ruble had slumped 30% against the US dollar before the central bank doubled interest rates to 20% and committed to unprecedented monetary support to maintain financial stability. With thousands of displaced refugees in Ukraine, and Russian citizens flooding to dispense cash from foreign currency ATMs, the state of affairs across the two nations can be described as nothing less than a crisis on both a humanitarian and an economic level.
What Does This Mean for the United Kingdom?
There are some sectors which the ongoing conflict may disproportionately impact. Naturally, the main exposures are concentrated within large-cap equities, where 70% of the earnings of FTSE 100 Index companies are generated overseas; however, we are seeing at least some impact across the capitalisation spectrum.
Oil and gas accounts for around 9% of the FTSE All Share index, and when we consider this alongside Russia as one of the largest exporters of oil in the world, the interrelationship becomes evident. As concern grows over the supply of oil from Russia to the Western world, the price per barrel has soared to as high as US$105, which provides a tailwind for the UK-listed oil giants. We have closely monitored BP’s decision to dispose of its 19.75% stake in Russian state-owned oil firm Rosneft, and sanctions aside, we would suggest that divestment has been a long-time consideration as BP repositions itself as a green energy leader.
We have also seen some shifts in the aerospace and defence sector as Russia’s invasion of Ukraine has prompted a review of European defence budgets. Thus far, Germany has vowed to invest €100 billion in its military this year in a response to a new era of Russian hostility, and investors are expecting other global powers to follow suit.
Conversely, Russia is a large supplier of titanium into the Western aerospace and defence industry, and this could potentially create some major supply chain issues should Russia retaliate to sanctions applied by the Western world. Within the UK-listed miners, we are seeing supply chain constraints feeding through to commodity prices. As doubt is cast over the future supply of commodities, the consequent price spike provides a tailwind for mining stocks. As with most commodity price increases, we must consider the flip side of the coin and who ultimately bears the brunt of the spike.
Higher commodity prices are likely to cause cost pressures on a number of industries, and we must be mindful that this could also feed through to consumer spending. We have already seen this year the extent to which rising energy and food prices can squeeze household budgets. As uncertainty clouds future supply chains, the pressures for companies operating in Europe are likely to have a knock-on effect across the value chain. This compromises the policy outlook for central banks, which are faced with a dilemma on whether to increase interest rates to combat inflation in the midst of such a geopolitical crisis, thus heightening the risk of an incorrect policy call. Consequently, forecasting to any degree of accuracy remains testing, so we believe that retaining our long-term discipline in quality companies trading on reasonable valuations will support our navigation through periods of volatility.
Franklin Templeton Key risks & Disclaimers:
Important Legal Information
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as of publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.
Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
Issued in the U.S. by Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com—Franklin Templeton Distributors, Inc. is the principal distributor of Franklin Templeton’s U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.
What are the risks?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Brokerage commissions and ETF expenses will reduce returns. ETF shares may be bought or sold throughout the day at their market price on the exchange on which they are listed. ETFs trade like stocks, fluctuate in market value and may trade above or below the ETF’s net asset value. However, there can be no guarantee that an active trading market for ETF shares will be developed or maintained or that their listing will continue or remain unchanged. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.
MeDirect Disclaimers:
This information has been accurately reproduced, as received from Franklin Templeton Investment Management Limited (FTIML). No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.
The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.
If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.