THE full-scale military invasion launched by Russia on Ukraine on Thursday morning took the world by surprise.
The stakes are high. For one, Russia is a key supplier of global energy, with Europe relying on about a quarter of its oil supplies and a third of its gas.
For another, Russia is at risk of being sanctioned by the United States and European Union (EU), which will have significant economic effects on it.
Malaysian stocks fluctuated wildly on Thursday, ending with a sharp drop of 12.25 points, or 0.77% to 1,573.89. Trading volume on Thursday was also amplified with 5.51 billion shares valued at RM4.12bil changing hands.
The market recovered on Friday surging as much as 22 points, before it closed 17 points or 1.13% higher to 1,591.72 points. Investors bought into technology, banking and commodity stocks.
This came after the US stock market recovered from its wild swing on Thursday night in Malaysian time, following the announcement by US President Joe Biden to impose new sanctions on Russian elites, state-owned enterprises and banks. The EU later announced its own sanctions.
Market observers reckon that the market has already anticipated the crisis since the beginning of 2022, and that investors should continue to look at corporate earnings growth when making investment decisions.
“We believe that any downward pressure on the market is only short-term, as long as the conflict does not escalate to a global conflict and corporate earnings remain intact,” says MIDF head of research Imran Yassin Md Yusof to StarBizWeek.
He points out that the current Russia-Ukraine tension would not have long-term implications to the global and local stock markets.
“Based on our analysis, markets tend to rebound rather quickly from the selloff at the start of a geopolitical crisis,” he adds.
As such, Imran says MIDF has maintained its 2022 FBM KLCI forecast at 1,700 points as it expects the Russia-Ukraine conflict would engender limited macro and corporate earnings fallout to the Asian region and Malaysia.
“Our baseline scenarios are that the land incursion and occupation by Russian military forces of Ukraine territory will be confined largely within the Donbas region.
The military conflict will be confined between Ukraine and Russia without active participation of other countries, and the Russia-Ukraine conflict may not worsen into a regional or even global crisis,” he says.
“We would recommend investors to continue to look for companies with solid fundamentals and a good environmental, social and governance (ESG) framework.
Investors should also look at taking advantage of the high commodity prices by investing in commodity linked companies,” he adds.
Meanwhile, a fund manager says that there have been a lot of uncertainties surrounding Russia and Ukraine since the beginning of the year, and that this has been reflected in the rising crude oil prices that have slowly gone up to above US$97 (RM407) per barrel for Brent.
“There are also other factors driving the crude oil price up such as supply chain bottlenecks globally and escalating demand of oil as more economies open up after the aftermath of the Covid-19 pandemic,” she adds.
While most Asian stock markets had rebounded from the shock yesterday, market observers reckon that uncertainties are still prevalent in the near-term.
UK-based Schroders multi-asset fund manager Dorian Carrell says that the broad-scale military operation is an “escalation not expected by markets.”
“A series of steps are likely to follow. Firstly, there will be the imposition of further sanctions from the West. We would also expect Russia to react in some way, possibly with counter measures.
With this in mind, and given that Russia’s ultimate military objectives are still unclear, we don’t think we are at peak uncertainty yet and further market stress could follow and volatility persist,” he says in a report.
Crude oil could sustain above US$100 per barrel
On Thursday, Brent crude oil prices jumped as high as US1$105 (RM441) per barrel, just a few hours after Russian President Vladimir Putin authorised a military operation against Ukraine, which exacerbated the prolonged supply shortage and rising energy prices.
This is the first time since 2014 that Brent crude oil went above US$100 (RM420) per barrel.
Other commodity prices also soared. Wheat prices are at their highest since 2008. Aluminium, nickel, and zinc have also boomed.
Schroders senior emerging market economist David Rees has increased his forecast on Brent crude oil to US$120 (RM504) per barrel from US$100 (RM420) previously.
He reckoned that Brent crude oil could go higher than US$120 (RM504) per barrel as uncertainties remain heightened.
“When we last published global forecasts in November, we had an oil price shock scenario at around US$100 (RM420), but we might have to go back to the drawing board now with our new forecasts.
“US$$120 (RM504) might be the new scenario, but it could rise even further, and it will have a bigger impact on growth.
“We need to wait and see how the dust settles on this, markets are volatile and uncertainty extremely high,” he says.
The surge in commodities prices was positive for the ringgit, which strengthened to 4.19.7 against the greenback from 4.20.30 on Thursday.
Icon Offshore Bhd managing director Datuk Seri Hadian Hashim expects that the oil prices could average higher than US$80 (RM336) per barrel as forecast by US Energy Information Administration.
“The main factors that will drive crude oil price this year are tight supply by the Organisation of the Petroleum Exporting Countries (Opec).
“Supplies are declining around the world due to lack of investment by oil major and supply chain disruptions,” he says.
He estimates that oil would average at US$85 and US$90 (RM357 and RM378) this year, which will be catalyst for the local oil and gas sector.
Hong Leong Investment Bank Research suggests that the surge in global commodity prices presented trading opportunities in the oil and gas and oil palm sectors.
“The local bourse, too, has not been spared with its bellwether index down 1.9% from its year-to-date high of 1,605 just a week ago. Still, there are pockets of trading opportunities from this,” it said in a note to clients.
Conflict could pose risk to economic recovery
The Russian invasion of Ukraine has raised fresh risk to a global economic recovery that had already been struggling with soaring inflation, supply chain issues and the ongoing Covid-19 pandemic.
While some economists say that Russia’s main economic impact to the world’s economy is its oil and gas resources, the economic impact of the fighting and the new sanctions by the US and its allies are still uncertain.
Bank Islam Malaysia Bhd chief economist Dr Afzanizam Abd Rashid raises his concern that the crisis between Russia and Ukraine dampens investor and business sentiment, which in turn could slowdown economic growth.
“We are concerned over the global recovery momentum especially if the conflict is prolonged. So the risk-off mode could set in, resulting in businesses being more cautious in their expansion plans,” he says.
He adds that the invasion has made it more challenging for the world’s major central banks such as the Federal Reserve (Fed), in balancing growth and inflationary pressures.
The Fed is expected to raise its key interest rate next month for the first time since the end of 2018.
“Global central banks could change their tact in respect to the monetary tightening decision. They might take a pause should the situation become highly unpredictable,” Afzanizam says.
He explains that the situation in Ukraine is alarming as it involves the major superpowers including the US, Europe and Russia.
“We are unclear as to how long it will continue and how severe it can be.
“At the moment, the retaliatory measures by the Western allies are centered around economic sanctions.
“It remains to be seen how effective these sanctions will be in diffusing the military operatives by Russia,” he adds.
The invasion of Russia has heightened the uncertainties that is already struggling with escalating commodities prices that could dent the global economic recovery.