• Geopolitical conflict between Russia and Ukraine threatens to escalate
• German and European stock markets particularly threatened
• Experts recommend hedging strategies
A possible Russian invasion of Ukraine could cause turmoil on the financial markets. Experts expect significant consequences for the stock markets, the German stock index DAX is likely to be particularly threatened, analysts from Goldman Sachs believe. The experts have determined in a sensitivity analysis that an escalation of tensions cause energy disruptions in Europe and sanctions against the Russian Nord Stream 2 gas pipeline, Reuters reports. Accordingly, it is to be expected that the increase in equity risk premiums by around 20 points could cause a 5 percent decline in share prices.
“We would expect the German DAX and MDAX to be more vulnerable than other country indices, mainly due to their companies’ reliance on energy for their production,” Reuters quoted as saying. German indices are overweight chemicals and capital goods but would have almost no energy companies to benefit from an escalation. “Additionally… Germany appears to be most affected by a Russian gas shortage due to its high reliance on Russian supplies. While Italy is also heavily dependent on Russian gas, the FTSE MIB has a significant exposure to energy stocks, limiting index underperformance would,” it said.
UBS recommends put options
In view of an impending escalation of the conflict, the equity strategists at the major Swiss bank UBS advise investors to prepare themselves for emergencies, according to a customer statement from UBS quoted by the Handelszeitung.
The Swiss experts also assume that the conflict will hit European consumers much harder than US consumers due to their dependence on Russian gas. Against this background, investors should be on the lookout for hedging strategies.
Specifically, the experts recommend putting spreads on the DAX. In this way, investors could bet on falling prices and benefit from a fall in the stock markets. In addition, the UBS experts have come to the conclusion that two-year German bonds are particularly popular in times of crisis. And investors could also take advantage of the strong fluctuations, with increasing volatility the South African rand tends to be weaker against the Japanese yen, the customer note goes on to say.
Specifically, the UBS experts recommend call options on the yen or the US dollar. The two currencies are likely to strengthen as investors look for safe havens in the event of a conflict, making the bets profitable.
French market at a glance
According to Reuters, experts see further hedging opportunities on the French stock market. Two major bank traders, who wish to remain anonymous, would recommend their clients to look at the French stock market and place derivative bets on volatility, a measure of the intensity of market fluctuations, the news agency reports.
Accordingly, the experts assumed that the fluctuations in French stocks would increase in the event of a conflict, since it is one of the most liquid markets in Europe. To cover some of the cost of such a bet, traders are advising clients to sell options on US stock market volatility, which is likely to be less affected by an escalation of the conflict, the report said. However, making such a two-pronged bet would also take away some of the profit should a conflict arise.
Gold purchase another option
The purchase of gold, a hedging instrument that is often used in times of crisis, is still an option for experts in the current geopolitical situation. Roberto Lottici, a fund manager at Banca Ifigest in Milan, is pursuing a no-nonsense old-school strategy by investing in gold, according to Reuters. The size of the gold and silver investments has been doubled to six percent of his fund, while he has cut put options and other hedging instruments that are expensive. “If the situation gets out of control,” Lottici said, “then it will [Gold] be one of the few assets that can provide protection.”
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