Before the Ukrainian crisis, macro conditions were already troubling for the exchange market in different sectors, especially for tech stocks. Prior to the crisis, with inflation at a 40-year high and the Federal Reserve signaling a series of interest rate hikes in the near future, some investors started selling their growth stocks, which resulted in the many exchange market, for instance, the Nasdaq, to be in the lowest position since March 2020, the early days of the COVID-19 pandemic.
Oil Sector
While the West has imposed financial and trade sanctions against Russia, energy exports have been partially missing elements particularly from the European side. The introduction of these sanctions by both the United States and the European Union countries has increased a risk premium to oil markets, although several attempts by western countries to manage and control the rise in energy prices.
Brent crude oil, the international benchmark for oil prices, and United States West Texas Intermediate crude oil futures rose to their highest prices since 2008. The price spike comes as the United States entirely banned the import of Russian oil and allies in Europe, significantly reducing oil imports from Russia, leading to heightened concerns over market supply.
On March 8, 2022, the Brent and West Texas Intermediate price increased to the highest since 2008, 139.13 USD and 130.50 USD, respectively. With oil surging more than 60 percent, concerns about world economic growth and stagflation are raised.
The event that drove these high prices was confirmation from the United States and European allies that they are exploring banning imports of Russian oil. The sanction could create a 5 million barrel or larger global shortfall, and oil prices could double from 100 USD to 200 USD.
The global market needs additional oil barrels to fill a 3 to 4 mb/d Russian export deficit will undoubtedly move into higher speed in the near future.
This could prove to be a tall order as immediate OPEC spare capacity currently rests with Saudi Arabia, UAE, Kuwait, and Iraq, and we estimate that, however, these four countries might only provide the global market with 2.5 mb/d within one month.
What are the benefits of the oil prices reaching 200 USD, particularly for energy-producing nations?
Most agree that any profits the countries that produce energy would gain by selling their oil at a higher price would be cancelled out by a surge in inflation, slower economy, and declining oil demand.
Not even oil producers would welcome high oil prices. High oil prices really aren’t great for any economy. Indeed, in energy-producing regions, there’s a lot of interest and excitement about prices when the oil price was lower than 80 USD.
Also, the longer-term consequences of higher oil prices have negative impacts, even for the producers as the consumers will try to reduce their consumption of energy because it’s resulting in decreasing their income, therefore, the oil demand destruction.
Russian Impose Restriction On Some Products
Russia has hit back at western sanctions by imposing export bans on different products until the end of 2022. The Russian export ban includes more than 200 products. The ban covers exports of telecoms, medical, vehicle, agricultural, and electrical equipment, as well as some forestry products such as timber.
It’s an impressive-specific selective list, but how much harm will these counter-sanctions inflict pain on the western countries? The bulk of what western nations buy from Russia is made up of raw materials. Mostly, oil and gas and metals like aluminium and nickel, additional to potash and phosphates, which are widely used in fertilisers.
Around the world, the conflict has already pushed the prices of these goods sharply upwards amid fears that the supplies could be disrupted. The prices of these products will probably further increase higher due to the Russian ban, which will cause economic pain, particularly in the United States and Europe.
However, in the long term, some banned products from Russian territories, such as railway cars and locomotives, are unlikely to cause much hardship. Nor will restrictions on the sale of agricultural machinery, for example. The inclusion of vehicles on the Russian list is a trouble for the European car manufacturers, likes of Vauxhall, Peugeot, and Citroen. It had been for a long time exporting of these vans made in Russia to Europe and other parts of the world.
But overall, the impact of the counter-sanctions looks more symbolic than significant. On the other hand, restrictions on exports of raw materials – if Russia were to introduce them – could have a much more dramatic effect on both sides, the Russians and the western countries.
Exchange Market
The effect of the Ukrainian conflict, and both the Russian and western sanctions, went far behind the energy, to impact the global stock markets as well, but hit harder some sectors than others. For instance, software stocks were most affected by the conflict, in which their values were down 53 percent, and price-to-sales multiples, on average, have compressed from 25 to below 12.
CNBC pulled a list of tech and tech-adjacent companies valued at 1 billion USD or more that have lost at least 75 percent of their value from gains since January 2022.
In the United States, one example of these software companies that have been negatively impacted is Wish. Wish is a discount mobile commerce app that has struggled since the Russian invasion. Since initiating its IPOs in 2020, the stock price was at 24 USD and raised as high as 32.85 USD before the crisis. However, On March 10, 2022, Wish’s stock prices were at low as 1.99 USD and were more than 90 percent below their one-month intraday high from almost a year ago.
Some companies, such as BlackRock, have lost over 17 billion USD on its holdings of Russian assets since the invasion. Investors held over 18 billion USD in Russian assets at the end of January 2022. However, the 10 trillion USD asset manager has subsequently marked down the majority of those to almost zero. BlackRock’s iShares Russia ETF has seen its assets under management decrease from 600 million USD to under one million USD since the Ukraine crisis began.
In some European Union countries, particularly Finland, there is high possibility of risks attached to the country following the Russian invasion of Ukraine and the sanctions imposed on Russia by the western world. For instance, investors withdrew almost 850 million EURO from investment funds registered in Finland in one month only, February.
Investors pulled 583 million EURO from long-term interest funds, 230 million EURO from short-term interest funds, and 75 million EURO from mutual funds. Investments in alternative funds amounting to 38 million and those in equity funds to one million EURO.
Companies Seeking Alternative
International western sanctions do not currently apply to fertilizers as they are essential for food production, but Russia has restricted exports of such materials.
For instance, production at the Yara International fertilizer plant in Finland has been curtailed due to difficulties in obtaining raw materials needed from Russia. Yara International is Europe’s largest fertilizer production company and operates the European Union’s sole phosphate mine in Finland.
One of the main components of fertilizers that Yara uses in the forestry and agricultural industry is potassium chloride. Since the sanction began, it has been increasingly difficult to obtain these products from Russia. As a result of Russia’s invasion of Ukraine and harsh sanctions it now faces from western countries, Russia has restricted its fertilizer product exports.
Also, the situation was worsening by, due to pricing fluctuations prompted by drastic changes in energy prices, new fertilizer orders been suspended. Fertilizer production costs have started to rise sharply due to increased materials and energy prices.
More than 80 percent of the ammonia and potassium salts for nitrogen, phosphorus, and potassium fertilizers have been exported from Russia to Finland. And a company like Yara manufactures around 220,000 tones of potassium sulphate used in fertilizers as well as 200,000 tons of feed phosphates intended for livestock production.
What Investors Should Do Now
If you have a well-diversified portfolio, your best move is likely to simply monitor the situation and control yourself.
The exchange markets, in particular, are very much in volatile, so any change you make in your portfolio could be in the wrong direction.
You might consider investing strategies, but you must practice caution wisely. If you’re looking to take advantage of lower stock prices, for instance, the situation by buying up lower stocks, it’s important to be cautious about the stock that you intend to buy.
The best option for an investor is to ignore an adviser who recommends you to buy energy stocks in this time. These stocks are already higher; investing in them a long time ago would benefit the investor now. If you want to buy stocks now, you should buy the stock whose price went down in this volatile period, but you must be cautious to research the company first.
Overall, it’s best for an investor not to try to time the market. Instead, we recommend that you take this uncertainty time to ensure your risk tolerance is still in line with your portfolio.
If the declined market swings are causing some investors to panic, maybe because they have only short-term needs for cash or they are running for getting rich quick strategy. However, if you are investing for a long-term gain, then you probably must know how to manage uncertainty situation.