Ukraine Driving Investor Uncertainty: Neptune

James Dowey, investment director & chief economist at Neptune Investment Management, has given his global economic outlook for Europe. He argues that the first quarter of the year has been stop-start for equities and believes that this has been due to investors’ lack of clarity concerning important macro questions, including the impact of the Ukraine crisis on the global economy.

Dowey argues that: “The current US and EU economic and financial sanctions applied to Russia, although narrowly targeted, are significantly detrimental to the Russian economy through the indirect channel of postponing investment and inducing capital outflows. Accordingly, the World Bank and the International Monetary Fund has recently downgraded their Russian economic forecasts to virtual stagnation in 2014, with an attached high risk of recession. However, the broader global economic impact has so far been very small.

“What could change this? The obvious answer is explicit unilateral Russian military intervention in eastern Ukraine – because it would almost certainly prompt much stronger sanctions on Russia, to which Russia may respond by limiting its energy exports. This would disrupt global markets in the short term. Although the risk of Russia limiting energy exports is significantly reduced by the fact that ultimately it would be a deeply self-defeating act, it cannot be entirely ruled out. As a result, geopolitical risk remains on the table in Q2.”

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