While the Russia-Ukraine conflict has caused much volatility within global stock markets, we think that its impact on China’s equity markets is unlikely to be significant. China has remained relatively unaffected by rising commodity prices and high inflation. Additionally, it is moving towards monetary easing instead, which is likely to benefit its stock market.
- iFAST Research Team | Published on 25 Apr 2022
- Several rounds of negotiations have taken place since Russia began its military strikes against Ukraine on 24 February 2022. The first few rounds had little effect, but Ukraine has recently indicated that it has renounced NATO membership and has made important progress in negotiations with Russia on related issues. A de-escalation and resolution in the near-term is uncertain.
- As seen in the previous two similar conflicts – Russia-Georgia War” in 2008 and the “Crimea Incident” in 2014, the shock to global equity markets was relatively short-lived.
- Moreover, the impact on China’s stock market is unlikely to be significant as from a monetary policy perspective, China is in a different place as compared to the rest of the world. It is likely to keep an easy monetary policy in order to stabilise the economy.
- Investors can participate in China’s stock market via the iShares Core MSCI China ETF (HKEX:2801) or the actively-managed JPMorgan Funds – China A (acc) SGD. For investors who may be interested in China’s domestic A-shares market, they can consider the iShares Core CSI 300 ETF (HKEX:2846) or the Allianz China A Shares AT Acc SGD.
Background and update
On 24 February 2022, Russian President Vladimir Putin launched a full-scale invasion of Ukraine. Following which, Russian armed forces carried out high-precision strikes against the Ukrainian military, and sanctions were subsequently imposed against Russia by US, Europe, and other countries. The conflict arose out of Russia’s concerns about NATO’s expansion to the east. After several negotiations during the conflict, Russia and Ukraine have not reached an agreement for the time being. Therefore, we cannot judge the duration of the conflict.
Impact on global equity markets
In view of the current geopolitical conflict, Russia has been slapped with various sanctions from US and Europe, including the removal of Russia’s main financial system from the SWIFT system, and a ban on imports of Russian oil and liquefied natural gas by the US.
Given how resource-rich Russia is (e.g. World’s second-largest oil exporter and supplier of over 40% of Europe’s natural gas supplies), Russia’s invasion of Ukraine has a huge impact on the supply of commodities, causing commodity prices to rise. The ICE Brent Crude Oil price for instance, has risen rapidly and has broken through the important USD 100 price barrier (Figure 1), adding to inflationary pressures. In fact, many countries are now in a high inflationary environment, and the US is one such example, with its Consumer Price Index (CPI) reaching a 40-year high of 8.5% in March this year.
Figure 1: ICE Brent Crude Oil Price
Figure 2: Post-Conflict Equity Market Performance
Looking at the performance of the major global financial markets in the two days after the conflict, the first day was generally lower except for the US market, with European stocks falling more. However, most markets saw a strong rebound the following day (Figure 2). This indicates that the market’s expectation of the impact of the event was consistent with previous similar conflicts between Russia and border countries, such as the “Russia-Georgia War” in 2008 and the “Crimea Incident” in 2014. History has shown that geopolitical military events tend to have a short-lived impact on markets.
Impact on China’s equity market
Unlike the US, China’s inflation rate has remained relatively stable (Figure 3 and 4). This has given the People’s Bank of China (PBOC) more room to ease monetary policy, a stark contrast to the US Federal Reserve, which has started raising interest rates. China’s interest rate movements have largely been independent from the other major economies as monetary policy is not so much driven by global events, but more by domestic factors. After the recent financial stabilisation meetings conducted by multiple departments, it is expected that there is the possibility of subsequent interest rate cuts and rate reductions.
For Producer Price Index (PPI), the rise in raw materials leads to higher costs for enterprises, which affects the growth rate of their earnings. Although China is the biggest export country of Russia and Ukraine, China’s commodities do not originate from the two countries, meaning that China’s commodity imports will not be greatly affected in a long run.
Figure 3: China CPI Inflation
Figure 4: China PPI Inflation
Although high inflation expectations tend to depress the performance of growth sectors, the photovoltaic sector and other industries will benefit from plans to accelerate the development of alternative energy. To achieve this year’s 5.5% GDP target and stabilise growth, real estate and infrastructure is expected to play an important role in the direction of policy efforts, and the banking sector is expected to provide assistance.
For Hong Kong’s market, the energy and resource sectors may gain directly due to the increase in energy and resource prices as a result of this conflict, with high earnings growth expected this year. Similarly, the logistics sector is expected to see greater net profit growth against the backdrop of the current capacity shortage as well as increased demand. In terms of the overall valuation of the two markets, refer to the CSI 300 and the Hang Seng Index (Figure 5 and 6), the PE of CSI 300 is now 12.32, with a median of 12.22 in the last ten years, and the PE of Hang Seng Index is now 9.13, with a median of 8.72 in the last ten years. After adjustment, both indices are around the median of the last ten years. The CSI 300 Index has fallen nearly 34% since February 2021 and is close to the May 2020 point. The Hang Seng Index has fallen 42% from February 2021 to date, close to its lowest point position in 2016. Therefore, the two major indices are already at lower points.
Figure 5: CSI300 Price and TTM P/E Ratio
Figure 6: HSI Price and TTM PE Ratio
Potential risk
Escalating geopolitical tensions could lead to further confrontation between Russia and Europe. It may lead to a total blockade of Russian exports from Europe, and energy prices will continue to rise, which will push up global inflation, and stock markets will suffer a huge impact.
In response to high inflation, the Federal Reserve may accelerate its rate hike schedule, which could hasten capital outflows from the Chinese market and have a knock-on effect on Chinese stocks.
Getting exposure to China’s stock market
The recent geopolitical turmoil and its impact on commodity prices have raised concerns about rising inflation. However, we think that China is unlikely to be impacted. The Chinese CPI has been running at a low level – roughly 1% in the first quarter of 2022, and China looks towards monetary easing instead of tightening. This will likely benefit its stock market. Similarly, the Chinese stock market may also benefit from the energy shortage, and the growing demand for upstream raw materials.
Investors can participate in China’s stock market via the iShares Core MSCI China ETF (HKEX.2801) or the actively-managed JPMorgan Funds – China A (acc) SGD. For investors who may be interested in China’s domestic A-shares market, they can consider the iShares Core CSI 300 ETF (HKEX:2846) or the Allianz China A Shares AT Acc SGD.
Table 1: Recommended products for Chinese equities
| Equity Market | Unit Trust | ETF |
| China | JPMorgan Funds – China A (acc) SGD | iShares Core MSCI China ETF (HKEX.2801) |
| China A-shares | Allianz China A Shares AT Acc SGD | iShares Core CSI 300 ETF (HKEX:2846) |