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February 24, 2022

The impact of Russia-Ukraine conflict on emerging markets

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Julius Probst
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Plunging shipping costs

The Baltic Dry Index is one of the most popular indicators for analysing the shipping market. It tracks the freight cost for dry bulk shipping, i.e., commodities, and as cargo ship supply changes little over the short-term, the Baltic Dry is commonly used as a leading indicator for future demand. 

This chart shows a significant decline in the index over the last few weeks. Given the reduced number of vessels anchored and at berth at Los Angeles harbour, this seems to indicate that supply chain problems are finally being resolved. Or maybe excess demand is easing as economic activity weakens.

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Armed conflicts and US equities 

In this next chart, we performed a slice analysis on the S&P 500 to show equity performance following after the start of armed conflicts. As you can see, equity indices typically start declining even before fighting breaks out – not surprising since stock markets tend to be forward-looking. What’s interesting here, however, is that the conflicts over recent decades have had little impact on US equity markets in the short term. We shall see whether the trend holds as Russian troops pour into Ukraine… 

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Russia and Ukraine lead fall in global equities 

With global equities, on the other hand, we can see a noticeable price correction since the start of the year – with Ukraine and especially Russia seeing the biggest declines. The Russian economy had already been underperforming for a long time and impending sanctions from the West will likely squeeze it further. Also bear in mind that despite being a formidable military power, Russia’s economy is smaller than that of Texas

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Investors short the ruble

Futures positioning shows investors are taking large net short positions in the Russian currency. The conflict with Ukraine will further push down the value of the ruble, which has already declined by some 8% since October 2021. 

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Ukraine and Russia lead jump in yields

Yields have been rising across all emerging markets, thanks partly to rising interest rates. But again, Ukraine and Russia are leading the phenomenon. 

The table below, based on JPMorgan indices, shows the year-to-date value change ranging from just 25bps in Turkey to almost 400 bps for Ukraine. 

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Emerging markets trade  

Delving deeper into emerging markets, the following chart ranks them by trade openness: the sum of imports and exports divided by GDP. 

Hong Kong and Singapore are the most open by far but it’s interesting to see that Russia is more open than other large economies such as China. 

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Eastern European markets losing out

Eastern European economies obviously have the largest exposure to Russia and are set to suffer most from the conflict in Ukraine given their historic trade and financial links. 

With Western sanctions about to make it harder for Russia to access global capital markets, it is interesting to see Eastern Europe’s “vulnerability” to foreign investment in general. As the chart below shows, the percentage of public debt held by foreign investors has fallen considerably over the years, particularly in the last two.

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Economic activity slows in emerging markets

Even before the start of the Russian-Ukraine conflict, there have been signs of weakening economic activity across emerging markets. Manufacturing PMI data shows the extent of the slowdown in the last three months.  

The slowdown is also visible in high-frequency data. 

The OECD’s weekly economic indicator, based on Google trends data and machine learning, is a good tracker of economic activity. 

In the chart below, we show the two-year change in weekly economic activity compared to eliminate the potential one-year base effects that could distort the picture. In the bottom pane, we show the difference compared to a hypothetical non-pandemic world. 

As you can see, weekly economic activity is showing a slight decline across four key emerging economies: Brazil, India, Russia and South Africa.

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