In our view, the border tensions between Russia and Ukraine could have substantial implications that have yet to be priced in by the markets.
Russia’s role in the physical markets
Russia is the world’s leading exporter of natural gas (17.1% of global production) and the second-largest exporter of crude oil (12.1%). For context, Saudi Arabia accounts for 12.5% of the crude market.¹
Russia and Ukraine are also significant agricultural producers: Their combined wheat, barley, and maize exports represent 21% of the global total, and together they supply 60% of the world’s sunflower oils. Russia and Belarus also account for approximately 20% of total fertilizer exports, which is vital for global food production.²
Meanwhile, Russia is one of the world’s largest producers of critical metals. It’s the biggest exporter of palladium (20.7% of total volume) and ranks second after Chile in terms of refined copper (7.1%). The country also holds the third position for nickel (11.2%) and aluminum (9.0%).³
The global macroeconomic impact of escalation
Potential punitive sanctions on Russia that disrupt the supply of such goods would have an important impact on the global economy, given the virtually inelastic demand for these strategically important resources.
Moreover, demand for these specific commodities has historically surged in times of conflict. This could be problematic for stretched global supply chains and trigger upward price pressure in an already painfully inflationary environment. In such a scenario, it would act as an additional stagflationary shock (lower growth but higher inflation) and, in this scenario, would hurt net importers of these commodities the most.
Notably, Asia-Pacific is the world’s largest net food and energy importer. However, we continue to stress that the region isn’t monolithic, so a spike in food and energy prices would have an uneven impact across the region. For net importers, such a development would translate into a negative terms-of-trade (the ratio of export prices to import prices) shock and the subsequent consequences for economic growth, exacerbated by weak domestic demand. The converse would be true for net exporters of food and energy. The largest net exporters of food and energy (and therefore least vulnerable), in our view, are New Zealand, Malaysia, Vietnam, Australia, and Indonesia.
That said, there are also larger spillover effects to consider:
- Rising food and energy prices would lead to higher inflation and inflation expectations. Food inflation could be particularly impactful due to the greater weighting of food-related items in Asian Consumer Price Index (CPI) baskets. Economies with the lowest net food and energy CPI basket weights and, therefore, least likely to be vulnerable in such a situation are Hong Kong, Australia, South Korea, and mainland China.
- We expect export momentum to slow as global consumption patterns normalize amid reduced inventories. Without strong export growth to materially offset rising food and energy import prices, some economies could be subject to worsening current account balances. Economies least reliant on foreign demand are the Philippines, Hong Kong, India, South Korea, and Thailand.
- Fiscal positions could deteriorate if governments increase subsidies to help contain inflation and ease the burden on low-income households. If this were to happen, it would take place at a time when budgets have weakened after two years of emergency pandemic responses. Markets with the strongest fiscal positions are Singapore, Vietnam, Taiwan, Thailand, and the Philippines.
- The risk of a liquidity shock arising from a combination of demand shock, supply shock, and a flight to safety would expose vulnerable economies with high debt levels to either a domestic credit or external funding shock. Economies with the most robust debt positions (low private sector and external leverage, as well as low debt-servicing costs) are Indonesia, the Philippines, New Zealand, and India.
- Having adequate policy room to respond to such a macro challenge is essential should a conflict materialize. Policymakers from net food and energy importing economies face a dilemma: They could raise interest rates at the cost of even weaker economic growth or choose to tolerate higher headline inflation at the risk of capital outflows, currency depreciation, and even higher inflation. Last, there's the option of imposing capital controls, but this could risk sovereign credit rating downgrades, reduced capital inflows, and lower long-term potential growth. In contrast, we believe large net oil-exporting economies will be better placed in such a situation.
Higher food and energy prices should improve current account and fiscal positions, capital inflows, local currency performance, and sovereign credit ratings. To the extent that currencies appreciate, or governments with strong fiscal positions opt to subsidize retail food or energy prices, the inflationary impact would generally likely be more muted relative to net oil-importing economies.
A screen for the least vulnerable to potential shocks
Singapore, Malaysia, the United States, Australia, and New Zealand should be the biggest beneficiaries of any surge in food and energy prices. Indonesia, the Philippines, New Zealand, and India appear least exposed to a potential liquidity shock. Balancing the simultaneous impact from these two shocks, our analysis suggests Malaysia, New Zealand, the United States, Australia, Vietnam, and Taiwan will be the relative macro-outperformers among the economies we follow.
A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange-trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other preexisting political, social, and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment.
Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments.
The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person. You should consider the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.
This material is intended for the exclusive use of recipients in jurisdictions who are allowed to receive the material under their applicable law. The opinions expressed are those of the author(s) and are subject to change without notice. Our investment teams may hold different views and make different investment decisions. These opinions may not necessarily reflect the views of Manulife Investment Management or its affiliates. The information and/or analysis contained in this material has been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.
Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained here. All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment or legal advice. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment strategy, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit or protect against the risk of loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management. Past performance does not guarantee future results.
Manulife Investment Management
Manulife Investment Management is the global wealth and asset management segment of Manulife Financial Corporation. We draw on more than a century of financial stewardship to partner with clients across our institutional, retail, and retirement businesses globally. Our specialist approach to money management includes the highly differentiated strategies of our fixed-income, specialized equity, multi-asset solutions, and private markets teams—along with access to specialized, unaffiliated asset managers from around the world through our multimanager model.
This material has not been reviewed by, is not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the following Manulife entities in their respective jurisdictions. Additional information about Manulife Investment Management may be found at manulifeim.com/institutional.
Australia: Hancock Natural Resource Group Australasia Pty Limited., Manulife Investment Management (Hong Kong) Limited. Brazil: Hancock Asset Management Brasil Ltda. Canada: Manulife Investment Management Limited, Manulife Investment Management Distributors Inc., Manulife Investment Management (North America) Limited, Manulife Investment Management Private Markets (Canada) Corp. China: Manulife Overseas Investment Fund Management (Shanghai) Limited Company. European Economic Area Manulife Investment Management (Ireland) Ltd. which is authorised and regulated by the Central Bank of Ireland Hong Kong: Manulife Investment Management (Hong Kong) Limited. Indonesia: PT Manulife Aset Manajemen Indonesia. Japan: Manulife Investment Management (Japan) Limited. Malaysia: Manulife Investment Management (M) Berhad 200801033087 (834424-U) Philippines: Manulife Investment Management and Trust Corporation. Singapore: Manulife Investment Management (Singapore) Pte. Ltd. (Company Registration No. 200709952G) South Korea: Manulife Investment Management (Hong Kong) Limited. Switzerland: Manulife IM (Switzerland) LLC. Taiwan: Manulife Investment Management (Taiwan) Co. Ltd. United Kingdom: Manulife Investment Management (Europe) Ltd. which is authorised and regulated by the Financial Conduct Authority United States: John Hancock Investment Management LLC, Manulife Investment Management (US) LLC, Manulife Investment Management Private Markets (US) LLC and Hancock Natural Resource Group, Inc. Vietnam: Manulife Investment Fund Management (Vietnam) Company Limited.
Manulife, Manulife Investment Management, Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.