The unfolding crisis in Ukraine has brought the markets one step closer to peak uncertainty, with investors waiting to see how the Ukrainians and the Western powers will react to Russia's invasion.

As the world watches the tragic events unfold in Ukraine, it is important to remember that this is, first and foremost, a human crisis with potentially devastating consequences for millions of people. However, as head of investment, it is my duty to assess the impact of this crisis on the markets and provide our clients with level-headed analysis.

Past crises have taught us that uncertainty is what markets fear the most. As uncertainty reaches its peak, the markets tend to experience the worst phase. With Russia's invasion of Ukraine, we have moved one step closer to peak uncertainty, but this is easier for investors to price than the previous phase of uncertainty.

However, there is one major source of uncertainty that remains: how the Ukrainians and the Western powers will react to Russia's invasion. While it is expected that the response will be tougher sanctions, there is also the question of whether the West will be willing to intervene militarily. Therefore, we have not yet reached "peak uncertainty," and it is too early to attempt to time the bottom of the market.

Instead, we are carefully assessing the consequences of the situation stock by stock, bond by bond. We have the flexibility to respond if and when buying opportunities present themselves. While some may view this crisis as an emerging markets issue, the impact is far broader than that. Europe, in particular, is arguably the most exposed to the impact of this crisis.

Beyond the impact of geopolitical risk on risk premiums, the main economic transmission mechanism is via energy prices, which poses particular challenges for Europe given its reliance on Russian energy. This has detrimental implications for growth and complicates the picture for the European Central Bank.

Assessing the Impact on Various Asset Classes

As the situation in Ukraine unfolds, the markets are watching closely to assess the impact on various asset classes. The equity markets have been the most affected, with the FTSE 100 down by 1.5% in early trading. The Russian MICEX index has also been hit hard, down by 11% since the start of the year.

In terms of bonds, the German 10-year bund yield, which is viewed as a safe haven asset, has fallen to an all-time low of 0.14%. This suggests that investors are fleeing to safety, and are willing to accept a negative return on their investment.

The oil market has also seen significant volatility, with Brent crude oil prices up by 4.1% to $69.55 a barrel, the highest level since 2019. This is due to the risk of supply disruptions given the situation in Ukraine and the possibility of tougher sanctions on Russia.

Assessing the Impact on Emerging Markets

While the impact of the situation in Ukraine is broader than just emerging markets, the emerging markets have been hit hard by the crisis. The MSCI Emerging Markets Index has fallen by 5.5% since the start of the year, with Russia being the worst-performing market.

The risk of contagion is also a concern, with investors worried that the crisis could spread to other emerging markets, particularly those with close ties to Russia. However, it is important to note that not all emerging markets are equally exposed to the crisis.

India, for example, is less exposed to the crisis than other emerging markets, as it is less reliant on Russian energy and has a relatively small exposure to Russia. Therefore, it is important to assess the impact of the crisis on individual emerging markets rather than view them as a homogenous group.

In conclusion, the current situation in Ukraine has brought the markets one step closer to peak uncertainty, and while it is impossible to predict exactly how events will unfold, it is clear that there will be negative consequences for the global economy. Investors should be prepared for increased volatility and the possibility of further declines in equity markets, particularly in Europe.

At the same time, it is important to remain level-headed and focus on the long-term fundamentals of individual stocks and bonds. By carefully assessing the potential risks and opportunities of different assets, investors can position themselves to weather the storm and even capitalize on buying opportunities as they arise.

In the coming weeks and months, it will be crucial to closely monitor the evolving geopolitical situation and its impact on markets. By staying informed and flexible, investors can navigate this challenging period with confidence and emerge stronger on the other side.