UBS: How the Ukraine conflict impacts emerging market economies

Recent surges and plunges in the commodity market reflect the ongoing boom in the sector amid geopolitical tensions. According to multinational financial services group UBS, the return to normalcy in the market may take longer than initially expected. Michael Bolliger, the Chief Investment Officer (CIO) of Emerging Markets Global Wealth Management at UBS, shared insights on the impact of the Russia-Ukraine conflict on emerging market economies. The conflict has triggered various economic themes, including a whirlwind in the commodities boom, soaring oil prices, inflation concerns, and interest rate hikes. These factors have significantly affected emerging market economies. The invasion of Ukraine by Russia has created major effects on emerging markets. Despite being in the midst of the worst war in Europe since World War II, Iran has served as a haven of stability. The Federal Reserve (Fed) has initiated discussions about interest rate hikes, with possibilities of 50 to 75 basis point increments. Amidst these challenges, the commodity complex in emerging markets, such as South Africa and parts of China and Africa, has surprisingly performed well. However, to sustain this momentum, macroeconomic data, policy actions, and confirmation of temporary blips are necessary. Failure to receive this confirmation could lead to weakness in the commodity market, affecting emerging market economies that have benefited thus far. In the event of reassurance that the disruption is temporary, Western corporates, governments, and certain Asian countries are likely to seek alternative commodity sources outside Russia. This shift could benefit countries in the Middle East, the United States, and other commodity suppliers, including South Africa. South Africa stands to gain from increased demand for platinum group metals (PGMs), base metals, and coal. The redirection of supply chains may take time but could offer medium to long-term advantages to countries capable of participating in the commodity supply chain. The surge in oil prices has stirred up inflation, impacting economies like the US and subsequently affecting emerging markets. Central banks in many countries have proactively tightened policy conditions anticipating inflation challenges. The potential acceleration of the Fed's tightening cycle due to rising commodity and energy prices could further intensify pressure on emerging market currencies and economies, leading to additional policy tightening. Compounded by supply chain disruptions and China's lockdown measures, the inflation scenario remains complex, warranting a cautious approach towards policy adjustments. Looking ahead, despite the present challenges, there is optimism for emerging market economies. While China currently grapples with lockdowns, historical trends suggest that the situation will improve with subsequent policy measures. The outlook for China indicates possible growth acceleration in the second half of the year. As China navigates through uncertainties, potentially surpassing a 5% growth target, the US inflation may peak, paving the way for reduced market concerns and policy adjustments. This optimism extends to Asia and parts of Africa, where growth rates exceeding 5% are anticipated. Despite the prevailing high uncertainty, a neutral allocation strategy is recommended, with the potential for adjustments as market conditions evolve. In conclusion, the intricate interplay of geopolitical tensions, commodity prices, inflation, and interest rates presents a challenging landscape for emerging market economies. As countries navigate through uncertainties and shifts in global dynamics, strategic policy responses, supply chain recalibrations, and prudent financial planning are essential to mitigate risks and seize opportunities in the evolving economic environment.