Analysts urge to pay more attention to the Fed than in Ukraine

Tensions in Ukraine have markets on edge. Stocks are swinging, oil is approaching $100 a barrel, and uncertainty hangs over investors big and small.

In the end, this could be more of a short-term headache than a long-term drag. At least, that is the view of analysts on both sides of the Atlantic trying to discern what the geopolitical crisis will mean for investor portfolios following Russia’s recognition of two self-proclaimed republics in eastern Ukraine.

Tom Essaye, a former Merrill Lynch trader who founded the newsletter “The Sevens Report”, expects the conflict to dominate the headlines in the short term. However, he does not expect it to dictate market movements in the long or even medium term. On the contrary, he believes that the most important factors “remain the tightening of the Federal Reserve and economic growth“, wrote.

JPMorgan strategists led by Dubravko Lakos-Bujas expressed a similar view in their most recent note to clients, citing that monetary policy tightening would be the biggest risk to equities and that Russia-Ukraine tensions represent a risk of low profits for American companies.

“But an energy price shock amid an aggressive central bank pivot focused on inflation would further dent investor sentiment and growth prospects.”, they wrote.

In the UK, Bloomberg Intelligence equity strategist Tim Craighead wrote that, “unless Russian energy supplies are cut off,” European stocks face limited risk. The crisis could “temporarily change the order in the leader board” in terms of European stocks, but Craighead noted that the market appears to be more focused on rising inflation, high spreads and central bank tightening.

Still, Steve Clayton, who runs HL Select Funds at Hargreaves Lansdown in the UK, said the crisis will not be over in a jiffy.

“Russian troops have not massed along the Ukrainian border for a bake sale”, he wrote in a note this Tuesday. “Depending on how this plays out, tensions and uncertainties are likely to remain tense for some time. The market will not like any escalation, nor will it trust any agreement between the parties, unless it is accompanied by a rapid demobilization of Russian forces around Ukraine.”.

Clayton sees US Treasuries and Japanese government bonds as potential beneficiaries as investors seek safe havens. Given the nature of the conflict, he also points to defense actions such as those of Bae Systems Plc as possible targets, given that “European politicians are unlikely to call for a reduction in defense spending while the Russian bear is angry.

Bank stocks, which have outperformed in Europe this year, could post losses. The UK has just announced sanctions on five Russian banks. The EU has proposed a package of sanctions on banks that finance Russian operations in the region.

Travel and leisure could also lose steam, as they often do when international tensions rise, Clayton wrote. Among several actions, he singled out Wizz Air, which has a major network in Central and Eastern Europe.

“Defensiveness can pay off during times of stress.” wrote. “People still have to eat, take medicine and have surgery. Food retailers and pharmaceutical companies like Sainsbury’s and AstraZeneca could spark interest, but Tesco’s exposure in Central Europe isn’t much help.”