Ukraine, Iraq enough to “test anyone’s nerve”

Melissa BrownSanctions on Russia could hit European markets more than the US, it has been warned as fund managers assess the impact of rising geopolitical tensions in the wake of US air strikes in Iraq last week.

Falling equity markets suggest to some fund managers the air strikes, coupled with the on-going Ukraine situation, are affecting investor behaviour adversely after several months in which market risk had been falling and correlations decreasing.

Speaking about the Ukraine, Melissa Brown (pictured), senior director in applied research at Axioma, says: "There seems to be, after the last few days, concerns about the spill over into Germany and other European countries. I think that it's going to be a kind of a wait-and-see and there is a need for caution there, certainly for any investment in Russia. It seems like Europe would be much more affected by reciprocal sanctions than the US."

Russ Koesterich, BlackRock's global chief investment strategist, says: "Rising geopolitical tension is certainly affecting investor behavior. Before retreating on Friday, equity market volatility was close to a four-month high and several so-called safe haven assets rallied."

Guy Stephens, director at Rowan Dartington Signature, a London-based wealth manager, says: "The current round of geopolitical distractions is enough to test anyone's nerve, but looking beyond them and focusing a little further out and on the fundamentals could be the key to success in what feels very much like a stock-pickers market."

In July, Axioma, a risk management firm, said in its Quarterly Risk Review that market rises in the second quarter were accompanied by substantially falling market risk, currency risk and correlations around the globe.

"Risk is on holiday," Brown said at the time.

But she acknowledges the changing risk landscape. "We have certainly seen risk in Russia increase, both in the equity market [and] in the currency, and in many other ways. Clearly investors are concerned about risk there."

Yet Brown, who holds a "guarded optimism" about markets, also says the risk outlook remains positive. "Risk has been declining for many months now, and correlations have been declining. So the underlying dynamics don't suggest that there is something bubbling under the surface that maybe we're not talking about."

©2014 funds europe