There is always something for investors to be concerned about and right now the crisis involving Ukraine is that something. Following the latest “revolution”, tensions in the Ukraine threaten a war on the European Union’s doorstep, which could disrupt Eurozone gas supplies and possibly drag in the US and Europe into a war against Russia. This has resulted in investors being slightly rattled for several weeks now.
The Ukrainian economy is too small and its problems too specific to have a direct impact on the global economy. The main risk has always been that it triggers further conflict in Ukraine and a wider Russian/west conflict.
Beyond effecting short term investor confidence, the impact on the US economy would be minor as it trades little with Russia – only about $US40bn a year. Europe would be more at risk, as having a major military conflict on its doorstep would not help confidence (at least initially) and it trades much more with Russia. The biggest risk relates to gas supplies as the Eurozone obtains 25% of its gas from Russia (but with a huge variation, for Germany its 35% and for France its 15%) – half of which flows through Ukraine. This could be threatened by civil war in Ukraine or if Russia decides to punish Europe.
However, Europe is not as vulnerable as perhaps feared. The mild winter has left gas stockpiles above normal levels and a Russian supply disruption would likely speed up a shift to alternatives including US LNG exports over time. So while there may be a dampening impact on Eurozone growth it may only be minor and temporary.
Our suspicion is that Ukraine is just another distraction for markets that will fade in the months ahead, but it may take a while to settle down and the uncertainty could get worse before it gets better. As a result it could remain a threat for negative impact on the investment markets for a while yet.
In Australia, company balance sheet strength and profitability will continue to provide a solid foundation. Earnings momentum continues to prove difficult to generate, particularly across the industrial stocks which are still burdened by cost pressures and demand issues. The Australian economy and equity market face numerous challenges, but corporate financial health is robust and dividends sustainable.
The easing in interest rates from the Reserve Bank of Australia is assisting with a continued focus to bring down the currency below US$0.85.
The target level for the ASX200 index for April 2015 is 5550-5650.
As always if you have any questions with regards to your portfolio or any other matter please do not hesitate in contacting our office.