Client information/ Capital market outlook 09.03.2022.
Hereby we would like to inform our clients about the effects of the extraordinary military conflict on the capital market.
The Russian invasion of Ukraine on 24 February 2022 and the consequent announcement of Western economic sanctions will have a serious impact on the regional stock and bond markets in the short term. The disconnection of a significant number of Russian banks from the international SWIFT system, the banning of Russian aircrafts from the airspace of EU member states, the USA and other countries, and the freezing of the assets of some Russian citizens are expected to cause severe damage to the local and global economy as well. The situation may change radically from day to day, which could cause significantly higher-than-usual volatility in global equity, commodity and foreign exchange markets.
Russian and Ukrainian bonds:
On March 6, 2022, Moody’s downgraded Russia’s long-term external debt to “Ca”. This rating was 9 levels(!) higher (better) on February 25. The credit rating agency decided to downgrade it’s rating radically due to the introduction of capital restrictions after the likely possibility that Russia would not meet its obligations. S&P maintains Russia’s long-term external debt rating at CCC, while Fitch downgrades it to C. “The C rating reflects Fitch’s view that a sovereign default is imminent´” – the credit agency said in a statement.
Contrary to earlier expectations, positive news arrived on March 7 for Russian corporate bond investors as Gazprom made a coupon payment on its bonds in U.S. dollars. This was despite the fact that Russian President Vladimir Putin issued a central decree over the weekend, stating that Russian companies would meet their obligations, but in Russian rubles. Incidentally, the Russian corporate bond market was active before the news of Gazprom’s payment
According to capital market reports, several hedge funds have shown buying interest in more liquid securities, which, have fallen significantly – like Ukrainian and Russian government securities -, losing about 50-70% of their value since early February.
Central and Eastern European bonds
Hungarian, Polish and Czech assets in the region, including foreign currency and government securities, have been under severe selling pressure in recent days. Due to the proximity of the war and the significant deterioration of the economic outlook, the region’s currencies have fallen significantly. The Hungarian Forint fell close to the 400 level against the Euro, but the Polish Zloty also weakened to an unprecedented level. Compared to the exchange rates at the beginning of the week, the exchange rates of the regional currencies have slightly strengthened to the news of a possible Russian-Ukrainian rapprochement. Whether the Hungarian Forint can return to its former trading range (350-370 against the Euro) depends largely on the further course of the military conflict and the reaction of the National Bank of Hungary (NBH). The NBH has not yet decided to take a sharp, decisive step, but this does not rule out the possibility of it in the future or even an extended cycle of interest rate hikes.
Rising oil, natural gas and other commodity prices are pushing market participants to raise their inflation prospects and interest rates again. There was a significant jump in the Hungarian market, which increased the yield on Hungarian government securities denominated in Hungarian Forint. In the case of bonds, yield and exchange rate movements are opposite, so higher yields mean lower exchange rates for investors. At present, it is still difficult to say when the cycles of interest rate hikes in the region may end, but yields have already risen significantly compared to previous years.
Russian stock market:
In their response to Western sanctions, the Russians banned foreign investors from launching buy or sell orders for securities traded on the Russian stock exchange, a decision which unfortunately also affects investors from the EU.
The Moscow Stock Exchange has suspended trading in all markets until further notice. The Russian stock market is still closed, however, a possible market opening would not mean a change at the moment, capital restrictions and sales bans on foreigners still exist.
Aegon AM CEE’s access to the Russian stock market is impossible. The conditions for the resumption of continuous distribution in the case of the Aegon Russia Equity Investment Fund are unfortunately still not met.
Global stock markets:
In the last days of February 2022, mainly Russian as well as Russian-exposed assets fell, but last week the sell-off spread to all major stock markets around the world. As a result of the escalating war and sanctions against Russia, the prices of most raw materials have risen sharply, with crude oil by 30%, wheat by 50% and European natural gas up 80% in just two weeks. This has further reinforced fears of stagflation, that is, the chance that the world will face persistently high inflation and, at the same time, slowing growth. The tightening of central banks and the impact of high inflation on consumption could lead to a severe slowdown in global growth. In recent weeks, therefore, analysts have revised their GDP growth expectations lower for this year, and inflation expectations significantly higher. Although this environment is not conducive to equity markets, stock markets have fallen much more than expected during the current correction, leading to markedly low pricing levels in many markets.
CEE stock markets:
The low pricing level is particularly true in the European and Central European equity markets, where in addition to the deteriorating macro environment, a significant geopolitical risk premium has also been priced in. As a result, the pricing of a very large number of companies has fallen to multi-year lows, indicating that much of the negative effects of the deteriorating outlook have already been priced in.
The war in Ukraine is entering in its third week, and the ceasefire talks have not yielded much so far. The Ukrainian and Russian foreign ministers will meet in Turkey this week, and although no serious progress is expected from the meeting, positions have converged somewhat. The USA and UK also imposed an embargo on Russian oil this week, but the EU did not join this sanction, as 34% of EU oil imports and 45% of its gas imports come from Russia.
Our announcements about the Aegon Russia Equity Fund can be found on our website at the following link:
We further inform our Clients that the suspension of the Aegon Russia Equity Investment Fund will not result in any change in the operation and solvency of the Aegon Asset Management CEE.
March 9 2022
Aegon Asset Management CEE
The information contained in this communication is for informational purposes only and does not constitute an investment recommendation, offer, investment advice or solicitation. The information contained in this communication may change. Past performance is no guarantee of future performance of the investment funds. Aegon Asset management CEE is not responsible for the investment decision and its consequences made on the basis of this information.