Navigating an investment portfolio around Russia's increasingly aggressive move into Ukraine will not be easy, but there's no excuse for ignoring the potential risks — and maybe opportunities — linked to the turmoil.
“Our diagnosis is that this thing is escalating and radicalizing, and we're extremely cautious about the entire region,” said Eric Fine, who manages emerging market debt portfolios for Van Eck Global.
Mr. Fine, who believes the global markets are missing the significance of Russia's recent show of force, is avoiding investing in all of Eastern Europe, including countries he's bullish on such as Hungary and Romania.
“I think the market is way too complacent about it by not respecting the basic dynamics in Ukraine right now,” he said. “Worst-case scenario, you're looking at a civil war and everything that that implies, including real risk to gas supplies, refugees and greater financial sanctions against Russia.”
Global financial markets outside of Russia have hardly budged in relation to the unfolding turmoil despite the possibility of disrupted oil and natural gas supplies coming out of Russia.
(Don't miss: Wall Street bond dealers whipsawed on bearish Treasuries bet)
Portfolio managers and market watchers say they are somewhat flummoxed by the tame market reaction, but are also advising that investors stay nimble, at least until some kind of resolution starts to take shape.
“We're looking at a huge influence in terms of energy, and to the extent there is an extended event that starts effect the financial markets, there could be some contagion and potential head winds,” said Michael Abelson, senior vice president of investment and product management at AssetMark.
He added that he has not recognized a lot of investment activity related to Russia from professional investors and financial advisers on the AssetMark platform, but “we have seen at least one portfolio manager put some money to work in Russian ETFs, suggesting there could be some value there.”
The Market Vectors Russia ETF (RSX) has declined by 6% since the end of February, and is now down 17% since the start of the year. By comparison, the S&P 500 Index has gained 1% since the end of February, and has a 1% gain from the start of the year.
Despite Russia's market dip, the looming geopolitical uncertainty continues to overshadow anything that might look like a value play in that part of the world, according to Frank Braddock, a registered rep at JHS Capital Advisors.
“My job as a portfolio manager for a financial advisory firm is to spend a lot of time looking at what blows things up,” he said. “What's happening right now in Ukraine creates uncertainty, and anything that creates uncertainty makes folks slow down their investing and that will hurt economies, and that's what has me the most worried.”
(More: Wall Street ties to Putin threatened as sanctions ratchet higher)
Even with no serious resolution in sight, there are a few givens with regard to investment strategies.
“In any kind of a crisis, one would expect crude oil prices to rise, but in this kind of crisis, it's more likely to affect natural gas prices,” said Clement Miller, an investment analyst at Wilmington Trust Investment Advisors.
Major parts of Europe are heavily dependent on Russian exports of natural gas, which has become the focus of debate over whether Russia will cut off supplies in response to sanctions for its actions in Ukraine.
Of the more than 445 billion cubic meters of natural gas imported annually to European countries, 130 billion cubic meters comes from Russia, followed by Norway at 109.8 billion cubic meters.
“If Russia really sticks it to Ukraine and then ups the price of natural gas and oil, Europe will have no choice but to diversify into other sources of gas and oil,” said Karyn Cavanaugh, senior market strategist at ING U.S. Investment Management.
“I actually think that could end up being good for U.S. investors,” she added. “Right now, we are the Saudi Arabia of natural gas, and if we were to start exporting that [in the form of liquid natural gas] it could be a huge opportunity down the road.”
Longer-term opportunities notwithstanding, the near-term focus remains largely on what could represent direct hits to energy and select consumer sectors, according to Todd Rosenbluth, a research director at S&P Capital IQ.
“If Russia becomes more isolated and there are sanctions on oil, that should cause the price of energy to move higher, and that's good for energy stocks,” he said. “The flip side is Russia and Ukraine are both large producers of wheat and other agricultural commodities, so consumer staples and related products will get hurt because higher commodity costs negatively impact consumer staple companies that have limited ability to pass along those higher costs to consumers.”
Until the situation in Ukraine either moves closer to a resolution or deeper into an actual conflict, the limbo effect will likely drive investors into a “short-term risk-off mood,” according to John De Clue, chief investment officer at
U.S. Bank Wealth Management.
“The major short-term impact is going to be on Russia, because that economy is already a mess,” he said. “And longer-term, any economy moving into
recession is not a good thing, especially with its back to the wall. That's why we think it becomes more challenging before it becomes less challenging.”
