Global CIO Commentary by Scott Minerd
So far, financial markets have failed to recognize the potential long-term seriousness of the situation in Ukraine. I suspect this may be because very few investors remember the Cold War period, and therefore, may not always place current events into a historical context. Many feel that having annexed Crimea, President Putin is satisfied with his lot and will not invade Ukraine. If history is our guide, this may be only the beginning of this crisis. It is worth remembering the initial feeling of relief in the United Kingdom after the signing of the Munich Agreement in the fall of 1938.
The belief that the situation will not get much worse is predicated on the notion that all political players ultimately act in the best economic interests of their country. The argument goes that in light of the inevitable sanctions and international isolation that would follow, Putin would not dare advance into eastern Ukraine. However, considering the strategic importance of controlling Ukraine, it can be argued that Putin is in fact acting in the long-term best interests of Russia and would be willing to suffer some short-term pain.
So what does this mean for markets? In the short-term, any “risk-off” trade in Europe will likely be positive for U.S. assets, particularly bonds. I expect to see more capital flow into the United States as a result of this ongoing conflict. Events could also slow the ongoing European economic recovery, stemming perhaps from the potential disruption to gas supplies, although it is unlikely to derail the expansion on the continent. Longer term, heightened aggression from Russia could reduce the pressure to cut the U.S. defense budget.
Heightened Tensions over Ukraine Would Hurt but Not Derail Europe
As the conflict in Ukraine drags on, the probability of more severe sanctions on Russia is increasing. Such sanctions could send Russia into a recession, but the impact would also be felt in Europe. In addition to potential disruptions to natural gas flows, it is likely that European exports and financial activity in Russia could fall, whether due to sanctions or to decreased Russian demand. Though not a substantial portion of European economies in aggregate, Russian exposure is meaningful in countries, such as Austria and the Netherlands. Germany’s trade linkages are also heavier than many other European countries, which may explain its reluctance to apply tighter sanctions.
EUROPE’S TRADE AND BANKING EXPOSURE TO RUSSIA
Source: Haver, BIS, IMF, Guggenheim Investments. Trade data as of 12/31/2013, bank data as of 9/30/2013. Note: AT=Austria, BE=Belgium, CH=Switzerland, DE=Germany, ES=Spain, FR=France, GR=Greece, IT=Italy, NL=Netherlands, PT=Portugal, SE=Sweden, UK=United Kingdom.
Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"). Guggenheim Funds Distributors, LLC is an affiliate of Guggenheim.
Read a prospectus and summary prospectus (if available) carefully before investing. It contains the investment objective, risks charges, expenses and the other information, which should be considered carefully before investing. To obtain a prospectus and summary prospectus (if available) click here or call 800.820.0888.
Investing involves risk, including the possible loss of principal.
*Assets under management is as of 3.31.2019 and includes leverage of $11.3bn. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management. Securities offered through Guggenheim Funds Distributors, LLC, an affiliate of Guggenheim, SI, GFIA and GPIM.
Guggenheim Investments. All rights reserved.
Research our firm with FINRA Broker Check.
• Not FDIC Insured • No Bank Guarantee • May Lose Value
This website is directed to and intended for use by citizens or residents of the United States of America only. The material provided on this website is not intended as a recommendation or as investment advice of any kind, including in connection with rollovers, transfers, and distributions. Such material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. All content has been provided for informational or educational purposes only and is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation. Investing involves risk, including the possible loss of principal.