Emerging Markets
Ukraine Crisis Could Hit Economic Recovery, Lead To EM Sell-Off - Pictet
Rising geopolitical tensions in Ukraine could hit the economic recovery in Europe and lead to a sell-off in emerging markets, according to Luca Paolini, chief strategist at Pictet Asset Management, part of swiss private bank Pictet.
Rising geopolitical tensions in Ukraine could hit the economic
recovery in Europe and lead to a sell-off in emerging markets,
according to Pictet Asset Management, part of Swiss private bank
Pictet.
Luca Paolini, chief strategist at Pictet Asset Management, said
that following Russia's intervention in the Crimea, the
escalating crisis in Ukraine could potentially slow down economic
growth in Europe if the gas supply from Russia to European
countries is disrupted.
“Should the situation deteriorate and result in heightened
tensions between Russia and the EU, a major casualty could be
Europe’s economic recovery, which is vulnerable given that the
region imports roughly 25 per cent of its gas from Russia, half
of which flows through Ukraine. Under this scenario, the euro
would likely weaken sharply against the dollar," said
Paolini.
“More broadly, with the recent rally in global stocks showing
signs of fatigue, the Ukraine crisis could prove the trigger for
a market correction," he added.
A number of wealth management firms have commented on the crisis
and its perceived impact on their business. To see an example,
click here.
Emerging markets
At the height of the crisis on Monday, the MSCI Emerging Markets
Index fell 1.6 per cent to 950.68, the biggest decline since the
end of January, and analysts believe an escalation of
geopolitical tensions could trigger another sell-off in emerging
market assets.
Despite this, Paolini believes this decline may prove contained
as not only are emerging market bond and stock valuations
attractive, but investor positioning in these assets is extremely
bearish.
“Any further fall in emerging market bonds, for instance, would
in our view increase the investment appeal of the asset class
versus developed market government debt. Ukraine aside, the
recent rally has nevertheless pushed equity valuations to levels
that look difficult to justify at a time when corporate earnings
forecasts continue to be cut," said Paolini.
Paolini continued: "With global economic growth slowing, the
picture in emerging markets is a complex one. While exports have
recovered, China remains something of an unknown quantity as it
struggles to balance the task of deflating a credit bubble with
meeting its annual growth target of 7.5 per cent."
“Longer-term, the prospects for riskier asset classes look more
encouraging. In Japan, we expect the central bank to increase
monetary stimulus as soon as the second quarter of this year. In
the euro zone, further monetary easing should also become a
reality. Hence, we are confident that global economic growth will
recover in the second half of 2014," said Paolini.
Regionally, Paolini favours Japanese and emerging market equities
over US and European stocks due to their favourable risk-return
profile.
“The recovery in emerging market bonds and currencies looks
justified on many fronts. Outflows from the asset class are also
moderating. Because of China and various political risks, we
remain wary of raising our exposure to emerging assets," said
Paolini.
“We prefer high-yield over investment-grade bonds.
Speculative-grade debt continues to trade at a yield premium that
offers more than sufficient compensation against the threat of
default, which remains low by historical standards," Paolini
added.