It is very unfortunate that the Russia–Ukraine conflict has escalated to such an extent and our hearts go to the people caught in this conflict.
Investors have been asking on the impact that the conflict has on Asian markets. There is limited direct economic impact from trade and foreign direct investments. However, Russia is a major producer of commodities like Oil, Gas, Nickel, Aluminum, Palladium, Cobalt, Steel and Fertilizers. Russia and Ukraine are also major producers of soft commodities like wheat, corn and sunflower oil. As such, the most direct impact from this conflict is from higher commodity prices
We summarize the implications to Asian equities as below:
Impact on Singapore is slightly negative due to high weighting of the financial sector and potential slowdown in the pace of interest rate hikes in the US due to increasing macro uncertainty. While higher commodity prices bode well for the Oil and Gas sector, the sector weighting is relatively small in the indices.
Direct economic impact to the ASEAN markets via trade and Foreign Direct Investment (FDI) is small. Russia accounts for less than 0.6% of ASEAN’s total goods traded by value in 2020 and less than 0.1% of FDI into ASEAN. The main impact is from higher commodity prices and higher food inflation.
The impact on Indonesia is positive as higher crude oil, coal and CPO (crude palm oil) prices are positive for the market.
Impact on Malaysia is mildly positive on higher crude oil and CPO prices.
Impact on Thailand is negative due to its impact on tourist arrivals from Russia which accounts for 5% of foreign tourist spending in Thailand.
The impact on Philippines is most negative as the economy is most sensitive to higher crude oil prices and food inflation.
The impact on China is mildly negative due to potential inflationary pressures. However, China is in a good position relative to other economies as inflation is moderately benign. We have a positive view on Chinese equities in 2022 based on its current easing cycle and our view that regulatory risks have peaked on the back of their emphasis on economic stability in 2022.
The impact on Korea is neutral. The direct impact would be from supply disruptions and cost escalation from specialty commodities for the semiconductor and automotive sectors. Comments from the semiconductor and automotive companies suggest that this risk is relatively mild as they have increased their inventory of industrial gas, chemicals and rare metals before the conflict. The Bank of Korea has room to maneuver by becoming less hawkish in the interest rate hiking cycle.
The impact on India is negative on higher inflationary pressures and the impact it has on rural consumption which would be negative for the consumer sectors. Margins for material and energy sectors could suffer as companies may not be able to pass through the cost increase in light of the important State elections in the coming weeks.
The impact on Taiwan is neutral. Taiwan has announced sanctions on Russia. Russia accounts for less than 0.1% of global chip purchases and there is also limited disruption to the semiconductor supply chain with the major chip-makers having made necessary adjustments to diversify their suppliers of essential raw materials following the 2014 annexation of Crimea by Russia.
HOW SHOULD WE INVEST?
The impact of the conflict itself would have differing impact on individual markets and it is difficult to forecast how this conflict would unfold. We suggest that investors maintain a well- diversified portfolio. Barring further escalation of the conflict, we still maintain our outlook for equities in 2022 with a preference for cyclical markets that benefit from reopening as we move towards a post-Covid-19 world. We reiterate a positive view on Chinese equities on policy loosening and peak regulatory risks, as well as a longer term positive view on disruptive innovative companies.
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