Local stock markets are forecast to feel a direct impact from global asset market turmoil, triggered by the heightening tension between Russia and Ukraine. Steeply soaring energy prices could also ultimately increase the risks of economic recession and inflation, analysts warned.
Global asset markets ― such as for equities, raw materials and cryptocurrencies ― are showing jittery signs ahead of the heightened uncertainties surrounding the two neighboring countries, as the U.S.’s top security official warned Friday that Russia’s military could begin an invasion of Ukraine any day now.
Reflecting the pressure from these grave geopolitical concerns, U.S. stock markets were under sell-off heat in Friday’s session; the Nasdaq Composite dropped by 2.78 percent, the S&P 500 shrank by 1.9 percent and the Dow Jones Industrial Average by 1.43 percent from the previous session. Adding to the losing trend logged earlier last week, the Nasdaq dropped by 7.6 percent, its worst fall since Oct. 2020.
Global oil futures soared to a seven-year high level over concerns that the potential Russian invasion of Ukraine would disrupt natural gas supplies. West Texas Intermediate crude for March delivery surged by 4.47 percent, while the global benchmark for Atlantic Basin crude oil Brent showed that April deliveries rose by 0.7 percent on Friday.
Meanwhile, gold, the representative risk-averse asset, saw its price rise. Gold Continuous Contract, an index reflecting several futures contracts, rose by 1.26 percent on Friday. Bitcoin’s price, on the other hand, fell to about $42,266 as of 3:20 p.m. KST on Sunday, a seven-percent fall from just two days ago, when the price exceeded $45,685.
Market analysts forecast that the soaring global oil prices would negatively impact local stocks’ valuations.
“If global oil prices surge (because of the current geopolitical tensions), local stock markets will come under the direct impact, with a higher possibility of domestic stocks being de-rated,” Huh Jae-hwan, a strategist at Eugene Investment & Securities, pointed out.
The analyst explained that the country’s trade deficits have been one of the reasons behind the fall of local stocks’ price-earnings ratios, along with global central banks’ tightened fiscal policies. Global oil prices need to be stabilized for Korean stocks to move in an upward trend, he said, as rapidly soaring energy prices would ultimately bring a higher chance of economic recession and inflation risks.
Yet, the analyst added that even if the de-rating of local stock markets is unavoidable, the impacts from the geopolitical threats won’t last forever. Although it is true that soaring oil prices could cause the excessive tightening of fiscal and monetary policies by major countries’ central banks, the geopolitical tensions won’t pose overall threats to the entire financial system across the board. Only some assets with high exposure to the Ukraine-Russia situation will be the most impacted.
In the long-term view, Korean stocks with solid earnings and cash flows, as well as key raw materials and consumer stocks, will still deserve investors’ attention, he added.
