(Bloomberg) -- Investors should hedge against an escalation of Russia-Ukraine tensions, according to UBS AG strategists, who warned that global markets are yet to price in such an outcome.
While Russian assets like the ruble and MOEX stock index have been “hit hard,” recent declines in global risk assets have been driven by concerns around central bank policy tightening rather than concerns over a conflict or heavy sanctions, strategists including Bhanu Baweja wrote in a note.
UBS highlighted the outperformance of European consumer stocks versus U.S. peers since mid-November.
“Given Europe's dependence on Russian gas, a European consumer is much more vulnerable to Russia-Ukraine conflict than a U.S. consumer,” the strategists wrote. “Presently there is little evidence of the market fearing a hit to European consumer demand from high energy/electricity costs and weaker incomes.”
Meanwhile, most of a recent gas price rise has come on days when Russia's own markets have been stronger or stable, suggesting the rally wasn't caused by fears of conflict or sanctions.
The MOEX benchmark has fallen about 18% since mid-November while the MSCI World index is down about 5%. The ruble has fallen about 6% against the dollar. “Given that the market can arguably be surprised only in one direction, it's wise to look for hedges,” the strategists wrote.
Investors could consider DAX index put spreads -- a way of betting on price declines -- due to Germany's dependence on Russian energy imports, they said. They also noted that funds often flow into German two-year bonds during times of distress, and said South Africa's rand tends to weaken against the Japanese yen when volatility rises.
Russia has massed over 100,000 troops, along with tanks and heavy weaponry, on Ukraine's eastern border. U.S. also has put thousands of troops on heightened alert for deployment to Eastern Europe. Moscow has denied it intends to invade.
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