How will the Russia/Ukraine crisis affect your investments?

The FTSE 100 (UKX) fell by 1.6% on Monday as the Duma authorised Russian intervention in Ukraine. The situation appeared to have calmed on Tuesday, but is this simply the eye of the storm, and what will be the impact for investors?

All equity markets were affected on Monday, as many investors moved into safer holdings such as government bonds and gold. Unsurprisingly it was the Russian MICEX exchange which dropped the most, at 12.5%, but European markets which depend on Russian gas supply also fell sharply.

The German DAX was down 3% in the mid-afternoon. The UK, which is less dependent on Russian gas, had recovered on Tuesday from Monday's fall, up 1.08%, but the impact elsewhere may be longer-lived.

Political situation

Analysts are divided on how long the political upheaval and market volatility might last, with many believing that the main crisis has passed.

"On a rational level, it seems unlikely that Russia would want to take on the economic liability of Ukraine, trade and political sanctions, and invite claims on its own territory," Schroders comments.

"Geopolitically it doesn't appear to make sense. The show of strength could be intended, ultimately, simply to burnish Putin's reputation within Russia as a strongman and defender of Russian values."

It is too early to start trying to pick out the individual companies that might be affected."Malcolm Graham-Wood

Chief executive of deVere Group Nigel Green also expects the problems or at least their impact on outside markets to be a "short-term phenomenon", as "investors are likely to classify the Ukraine-Russia stand-off as 'a local issue'."

However, others take a more pessimistic view, seeing the potential for greater volatility in the future, especially as Russian gas company Gazprom has announced an increase in gas prices for Ukraine which will push the country closer to default.

Interactive Investor's head of investment Rebecca O'Keeffe comments: "The potential for further escalation is far from over and with market reaction to both news and rumour immediate, volatility remains high.

"This increased volatility has impacted almost all areas of the market, from equities to bonds and commodities, and whilst it has undoubtedly created a number of buying opportunities, with the political, economic and energy risks so high, investors will need to be careful."

This view is supported by those who believe the crisis has the potential to mimic the brief 2008 war between Russia and Georgia. The stand-off over South Ossetia led to one of the biggest sell-offs in history for the Russian stockmarkets, and economists from Capital Economics believe the tension between Russia and Ukraine has the potential to have a greater impact as Ukraine is a larger country with greater ties to the EU.

"The crisis in the Ukraine has the potential to have a further significant and prolonged impact on global financial markets, even though our current judgement is that the fallout is likely to be short-lived," the economists say.

FTSE stocks

Oil and gas analyst Malcolm Graham-Wood believes "it is too early to start trying to pick out the individual companies that might be affected", but does add that BP's involvement with Rosneft "adds to the risk factor significantly".

IG market analyst Alastair McCaig agrees that BP was one of the stocks which "weighed heavily" on the FTSE 100 on Monday.

Meanwhile, although miners Randgold Resources and Fresnillo benefited from the "flight to safety" on Monday, O'Keeffe believes that Glencore Xstrata is likely to be adversely affected as exposure to Russia and Ukraine through a shareholding in aluminium business Rusal and grain business in Ukraine will outweigh the impact of improved commodity prices.

Commodities

A number of commodities have been affected by the crisis, particularly gold, oil, natural gas and grain. The fact that much of the West's energy supply comes through Ukraine from Russia means that any conflict between or with these countries will push up prices while the Ukraine's status as a major supplier of grain has increased the prices of wheat and corn. Gold is up as it is seen as a safe haven by investors.

"Commodity prices overall have spiked to a six-month high," comments Stephanie Flanders, chief market strategist at JPMorgan.

Further spikes in prices cannot be ruled out as events continue to unfold. The rise in oil and gas prices is perhaps a timely reminder of why investors should have some always have some exposure to commodities in their portfolios."Stephanie Flanders

"Further spikes in prices cannot be ruled out as events continue to unfold. The rise in oil and gas prices is perhaps a timely reminder of why investors should have some always have some exposure to commodities in their portfolios."

Neil Gregson, head of the JPMorgan Natural Resources fund, agrees: "Recent events remind us of the structural importance of commodities such as oil & gas to the world, and that investors should continue to take note of this sector both today, and over the longer term, given the compelling investment opportunities the need for these essential commodities present."

He says that while his fund has less than 2.5% exposure to companies with a direct link to Russia and Ukraine, it has 30% exposure to the oil and gas sector, making it ideally positioned to benefit from rising prices of these commodities.

"Diversification of the geographical sources of these commodities, as well as investment in new technologies to secure the future supply of gas and oil is clearly essential," he adds.

However, the Morgan Stanley research team believes the impact on gas prices is "limited" as we are nearing the end of a warm winter, reducing demand for gas, and although three out of the four major gas pipelines connecting Russia to Western Europe flow through Ukraine, it has recently added new capacity through Belarus.

This reduces the impact of Russia's conflict with Ukraine, but will do little to help if conflict develops between Russia and the EU.

Emerging markets

It is widely agreed that the greatest impact of the crisis will be on emerging markets, both as it will largely be confined to Russia and Ukraine, and because it reminds investors that political uncertainty is "a fact of life for emerging and frontier markets", in the words of Octopus Investments' investment director Oliver Wallin.

"Emerging markets appear to have stabilised for now, but there are still areas of concern," Wallin comments.

At current valuations, investors would not have to take a very optimistic view on Russia's future to see some potential upside in Russian assets once the crisis has abated."Stephanie Flanders

"Some of the big pension funds are said to be looking to increase their exposure to these markets but they, like us, are most likely awaiting a further correction before entering the fray."

Flanders agrees: "Investors should be prepared for further volatility, in the region and across emerging market assets."

However, despite analysts predicting that Russia will be most severely affected by the crisis, she adds: "With regard to Russian equities, it is fair to say that a great deal of bad news is already 'in the price'.

"At current valuations, investors would not have to take a very optimistic view on Russia's future to see some potential upside in Russian assets once the crisis has abated."

The Morgan Stanley research team agrees that Russia has been oversold and advises that "any reduction in tension would constitute a buying opportunity".