Head agency: How to hedge against volatile Russia-Ukraine tensions?

2022-05-08 0 By

It has been a tumultuous week for global markets, with the Dow Jones Industrial Average recording its biggest drop of the year on Thursday, as investors appeared to see that Russia-Ukraine tensions could suddenly escalate, according to MarketMatrix.net.While Russia (RUS) claims to have withdrawn, the leaders of the United States (USA) and its Western Allies say otherwise, while Ukraine (UKR) accuses Pro-Russian separatists of shelling a civilian village.The situation seemed ready to escalate.A wide range of assets were affected by the geopolitical tensions, including oil and gas, wheat, the Russian rouble and safe-haven assets such as gold, government bonds, the Japanese yen and the Swiss franc.Philippe Lisabach, chief global strategist at Credit Suisse, told CNBC earlier this week that any confirmed downgrade would boost risk assets after a period of uncertainty and volatility.”If we can sort out the geopolitical issues that we’re facing right now, I think the global economy will take a breather, risk appetite will certainly come back, and cyclical stocks and value stocks will probably do better, particularly in Europe, which is in pressure neutral, and we think the region can continue to outperform,” he said.Given the many possible outcomes of the current impasse, investors have been reluctant to adjust their portfolios, preferring to hedge their bets in the hope that things will blow over on their own – usually, but analysts say this time could be different.Anthony Rayner, multi-asset investment manager at Premier Miton Investors, said: “We rarely seek to position significant geopolitical risk because it is so opaque.Having said that, we do have some general geopolitical hedges in our portfolio, mainly gold, some oil exposure depending on the source of risk, and of course some government bonds, albeit with shortened maturities.”Bhanu Baweja, chief investment banking strategist at UBS, said earlier this week that markets are not actually hedged a lot of risk, except for energy and Russian assets.”We’ve seen the stock market come down a bit, but if you look at consumer durables – because it’s an industry or sub-sector that is definitely going to be affected by slower growth and higher inflation – in Europe it’s doing better than in the US,” he said.Us high-yield bonds have also underperformed Europe, while the euro has remained relatively stable, he adds.Mr Baweja said the market was tracking a “playbook from 2014″, when Russia first invaded Crimea and sanctions were imposed over the summer.”What really happened during that period was that certain stocks were affected, oil went up a little bit and then went down, so there wasn’t much happening in the stocks, so it really became a regional event,” he said.But he noted: “This one seems to be much more serious, but I think investors don’t want to completely upend their way of thinking and may want to look for hedges rather than completely change their core portfolios.”In terms of hedging, Baweja suggested that due to the central bank policy shift, the volatility of stocks and bonds has been high, investors should pay attention to the volatility is still relatively low in the foreign exchange market.”Similar to 2014, I would look at central and Eastern European fx, such as USD/Poland or USD/Czech koruna, to hedge,” he said.”Russian assets themselves have changed a lot, so they price a lot of risk together with energy, which also means that if things get better, then you really shouldn’t see a big relief in global equities as a result, you should see Russian assets go up and energy assets go down,” he says.If things escalate, Mr. Baweja recommends currency hedging rather than buying defensive stocks or favoring U.S. assets over Europe.”If we have to look for hedges in equities, we think the DAX and European banks are probably the best hedging instruments,” he said.While stock markets in Russia and around the world continued to react to geopolitical developments, the rouble remained relatively strong around the 75 mark against the dollar, despite some volatility.Flows into the rouble could make it Russia’s most resilient asset class, with high energy and natural gas prices pointing to a strong current account surplus, Luis Costa, fx and rates strategist at CitiGroup, told CNBC.”We believe – in the overall portfolio of rouble risk, Russian risk, credit, interest rates, bonds and fx – fx will continue to be the most resilient component,” he said.————— Market Matrix: Futures & Derivatives Trading Research Center – Find your best trading opportunities from our selected stream of top news sources like Bloomberg/Reuters /CNBC/WSJ!+++ Top investment banks macro/stock index/crude oil/gold research report and strategy!+++ Economic data/industry report in-depth interpretation!+++ Follow ++ View all resources