Markets become increasingly volatile as Russian troops invade Ukraine

Diplomatic talks to keep Russia out of Ukraine have failed, with the former now embarking on a full-scale invasion of its former constituent republic. Here at Business Leader, we spoke to a number of experts about the impact this is having on global markets.

Oil prices

On Tuesday the 22nd, it was reported that oil prices rose to almost $98 a barrel. Steve Clayton, Select Fund Manager at Hargreaves Lansdown, looks at what this means for the market and which stocks to consider and avoid.

“Russian troops have not massed along the Ukrainian border in order to hold a cake sale. However this unfolds, tensions and uncertainties are likely to run hot for some time to come. The market will not like any escalation, nor will it trust any settlement between the parties unless accompanied by a rapid demobilisation of Russian forces around Ukraine.

“Whenever international tensions flare, money tends to rush toward safe havens and the greatest of these has long been the US Dollar. The Yen could also benefit. Japan has stayed well away from this argument. Cautious money tends to head to the least risky assets, so it looks likely that US Treasuries and JGBs could benefit.

“Defence stocks, like Bae Systems, could provide safe havens; European politicians are unlikely to urge for lower defence spending whilst the Russian bear is growling angrily.

“Banking shares could come under pressure. Effective sanctions will impact on economic activity and banks will be where it is felt in the West. Lending volumes would be hit too if tensions really rocket because cautious consumers and businesses will refrain from borrowing until they feel more confident.

“Travel and leisure stocks are always going to react warily to rising international tensions. Wizz Air, with its large flight network across Central and Eastern Europe stands out here, but other airlines and tour operators like easyJet and Tui will also be impacted.

“Times of tension are when defensiveness can pay off. People still have to eat, take medicines and get operated upon. Food retailers and drug companies like Sainsbury and AstraZeneca could be interesting, but Tesco’s exposure to Central Europe will not help.

“Stocks with Russian exposure include BP, where exposure comes via a 19.75% shareholding in Rosneft, which is notionally worth around $12bn, having just plummeted by around 25% in recent days. Hyve Group was built around an exhibitions business in Russia and is still substantially exposed to the Russian economy, but a recent deal to acquire Ascential’s portfolio of shows has at least diluted the exposure.

“But perhaps the real message for investors is that in the long run, it rarely pays to worry about the headlines. If it looks as though share prices are coming under pressure, go look for bargains.”

The toll on Lloyds Bank

Following the announcement of the Ukraine crisis, shares in Lloyds Bank fell 8.7%.

The UK banking giant recently published its latest results, which saw net income rise 9% to £15.8bn, reflecting a four percent increase in underlying net interest income to £11.1bn. Other income rose too, and Lloyds benefited from higher used car prices because of its exposure to car finance.

The release of credit provisions meant underlying profit rose to £8.0bn from £2.2bn.

The group also announced a new strategy and will spend £4bn over the next few years. The bank’s priorities for the new strategy include further digital investment and expanding wealth services.

Lloyds announced a final dividend of 1.33p, taking the total payment for the year to 2.0p. A buyback of up to £2.0bn was also announced.

Commenting on Lloyd’s recent results, Sophie Lund-Yates, Equity Analyst at Hargreaves Lansdown, said: “Lloyds shares fell steeply on news of the Ukraine crisis. As a more traditional bank, Lloyds has more exposure to the ups and downs of the UK’s economy. While slightly more sheltered from international turbulence, the tragedy of the Ukraine crisis and the unknown implications have made their presence known in the UK’s market.

“An escalation could well breed reduced consumer confidence here, which would be a tough environment for Lloyds.

“Lloyds has the UK’s biggest branch network, meaning it’s a bread-and-butter current account and lending house. That makes recent interest rate hikes especially welcome, as does the better-than-expected macroeconomic backdrop in the wake of Covid. All that means, much like its peers, is that it’s sitting on an unimaginably big pile of excess capital. The top slice of which is coming back to shareholders via buybacks – which also echoes moves by other banks in recent days.”

“A full-scale assault causing fresh volatility across the financial markets”

Susannah Streeter, Senior Investment and Markets Analyst, Hargreaves Lansdown, says Moscow’s bullying tactics have turned into a full-scale assault causing fresh volatility across the financial markets.

She comments: “Moscow’s bullying tactics have turned into a full-scale assault, with Ukraine’s worst fears materialised as Russian forces have begun a major attack on the country. This is a devastating turn of events for citizens in Ukraine who had waited in vain for a diplomatic resolution.

“Already the invasion has caused shockwaves across the world’s financial markets as cities in Ukraine have come under fire. The FTSE 100 has dropped by 2.6% on the open, and France’s CAC 40 and Germany’s DAX are down 4%, following Asian markets deep into the red.

“The threat of war had already been hanging over investors, and the shock of the invasion sent the price of oil hurtling up by more than 7%, way above $100 a barrel, reaching more than $103 before falling back a notch. Oil and gas prices are likely to stay highly elevated with hard-hitting sanctions set to be imposed by the international community. Market volatility has increased since the beginning of the year, stoked by rising interest rates, and today’s news has added fuel to the market turbulence.

“With Ukrainian airspace shut, and fears that renewed optimism of the travelling public will be severely dented with war underway, that’s led to a big slide in airlines and travel sector stocks.

“International Consolidated Airlines Group, the owner of British Airways, has dropped by around 5%, while Wizz Air with its extensive operations across Eastern Europe, in particular, nosedived by around 8% in early trade. Rolls Royce, so highly reliant on commercial air travel, was among the biggest fallers on the FTSE 100 given it’s highly reliant on commercial air travel.

“Russia exposed stocks like Evraz, the mining and metals company which Roman Abramovich owns a stake in, which has plunged by around 18%, and Polymetal International with mining operations across Russia also dropped by 7%. With tough incoming sanctions expected, their businesses are likely to take a major hit with little respite in sight given the seriousness of the situation.

“Stocks with Russian exposure also include BP, via a 19.75% shareholding in Rosneft, and BP also fell on the open, despite the higher oil price which helped push up Shell’s share price. The risers in the FTSE 100 were few and far between with Bae Systems among them with expectations that defence budgets may be boosted in the face of Russian aggression.

“With this rocket flare in international tensions, the rush towards safe havens is underway, and already the US dollar, Japanese Yen and the Swiss franc have been in demand, while the Russian rouble has tumbled to a fresh record low. Bonds are generally seen as the most reliable assets in a time of emergency, even though this war is also set to fan the flames of inflation. Gold miner Fresnilllo jumped 4% with expectations there will be a further demand for the precious metal given the intense nervousness on the markets.

“There will be pressure on banking stocks, particularly banks in France and Austria, as they have the largest exposure to Russian loans. Lloyds and Barclays were around 5% lower in early trading, with nervousness rising about the impact on their lending businesses. Depending on how long this crisis continues, there could be a significant loss of confidence among businesses and consumers here as they may limit borrowing until they feel more confident.

“This is likely to be felt the most in Europe, and it could lead to the ECB extending stimulus to help countries cope with the knock-on effects of the conflict. Miners have not been immune to the sell-off, given the shock war has presented, and there are worried there could be a downturn in demand for some commodities if the situation escalates further.

“Investors are likely to be seeking out more defensive positions in healthcare and pharmaceutical stocks to shelter from market turbulence. However, investors also need to keep their nerve and have an eye on the longer horizon. The shock of conflict is devastating, but history does point to relatively short-lived volatility on financial markets. Investors should try to look beyond these events and focus on their long-term goals.

“Daily market moves are concerning, but trying to transact in periods such as these invariably leads to over-trading and capitalising losses. Investors should not panic, but take the time to ensure that they have a diversified portfolio with a basket of assets spread across different sectors and geographies.”

Pledges from the UK Government

On Wednesday, Foreign Secretary Liz Truss reiterated the UK’s commitment to providing up to $500 million in loans to support Ukraine and mitigate the economic effects of Russian aggression.

During the announcement, the UK said it is ready to offer guarantees of Multilateral Development Bank (MDB) lending for projects that will support economic stability and vital reforms such as tackling anti-corruption.

The government says this support will help mitigate economic impacts on Ukraine’s economy due to Russia’s aggression.

Foreign Secretary Liz Truss was quoted during the announcement saying: “We are putting our money where our mouth is and using Britain’s economic expertise and strength to support the people of Ukraine. These guarantees can help inject vital capital into Ukraine and help its economy weather the storm of Russian aggression.

“Britain stands four-square behind Ukraine and its people. We stand ready to offer direct economic support, providing defensive weapons, and exposing Russian attempts to engineer fake pretexts for invasion.”

In December, the UK also increased the amount of financial support available to Ukraine from UK Export Finance (UKEF) – to £3.5 billion – and signed a new treaty that will help Ukraine access the UK supply chain to enhance its naval capabilities.

This economic support comes on top of increased support for military equipment from the Ministry of Defence and enhanced support to the humanitarian system in Ukraine.