Blog : Costing Out the Ukraine Crisis; The Calendar Strikes Again

by Ed Zwirn on April 25th, 2014

The Ukraine crisis has cost investors in European companies at least $140 billion so far, according to a recently released study by S&P Capital IQ.

The study identified 106 publicly traded companies in the U.K, Germany and France that had either supplier or customer relationships with Russian or Ukrainian businesses within the past two years. The findings show that huge losses have already occurred and have already exerted downward pressure on global financial markets.

British companies have apparently fared the worst so far, with their share price losses greatly outstripping broader market declines. According to S&P Capital IQ, the 32 U.K. companies with Russian or Ukrainian business ties lost 14.1% of their market value in the two months which ended on April 14. This equals a total fall of 57.5 billion British pounds, or $96.6 billion.

Shareholders of the 29 German companies on the list took a collective 20.8 billion euro ($28.7 billion) hit, losing 3.1% over the two months. The 45 French companies took a lesser hit, decreasing 2.8%, or 10.7 billion euros.

This occurred in the midst of (and undoubtedly contributed to) a bad showing for European stock markets over the period, with London's FTSE losing 1.2% from Feb. 14 to April 14 and the continental DAX performing even worse, with a 3.3% loss. In contrast, the Down Jones Industrial Average squeaked by with a 0.1% gain.

The two month European market hit began with pitched battles between the Ukrainian opposition and forces loyal to then-President Viktor Yanukovych. Since then, we have seen the March referendum and subsequent annexation by Russia of the Crimean peninsula, followed by a shift of scene to the east, with the danger that conflict between pro-Russian separatists and the Ukrainian army could spill over into a disastrous cross-border conflict.

This could hardly prove good news for the many European companies with business ties to these countries. That being said, you can get into a chicken-versus-egg quandary when assessing the relationship between individual companies or market sectors and the broader market risk in which they participate. Europe, it goes without saying, continues to suffer from structural problems of its own, but the massive disruption to the share values in the S&P Capital IQ report can't have help matters.

It has been correctly observed that the reduction by the U.S. Federal Reserve Bank's QE2 monthly monetary stimulus, from $85 billion last year to the current $55 billion, along with the expectation that this money will taper off into oblivion over the next six months, has exerted downward pressure on markets not only in the U.S. but also around the world.

Headline numbers generated by Fed announcements are by their nature precise and easy to track Share price drops at individual companies are often incremental and escape the notice of the larger market. But the numbers here are persuasive: $140 billion of investor money disappeared from investor pockets during two months which coincided with the Ukrainian crisis heating up. It would take three months of Fed QE2 payments at the current rate to put this much money back into the system.

Bleak Months Ahead...

There has been much written about the tendencies of stock markets to overperform or underperform in any given month. Most have heard of the so-called January effect, according to which stocks typically overperform during the first month of the year. Other statistical-driven prognostications which I have covered in this investment blog include the Halloween effect, the "day of the week" effect, the calendar month effect and the holiday effect. One paper I've looked at even purports to show a lunar phase effect.

Now a recently written research paper attempts to put all these results into one unified calendar. To do this, Vichet Sum of the University of Maryland's School of Business and Technology analyzed the performance of stock markets in 70 countries.

Not surprisingly, the research confirms the common wisdom about the January effect. Throughout these 70 markets, January saw an average gain of 2.8%, topped only by December's 3.09%. April came in third, with an average return of 2.3%.

However April plays out this year, the months ahead are statistically likely to be bleak ones, according to the research. Average May returns at 1.09% are the seventh-weakest average. June ranks even lower with a 0.68% rise, July's dead-cat bounce averages 1.8% and August and September, at 0.28% and 0.07%, are much worse.

It may be that a feel for these numbers have contributed to the recent spate of analyst statements warning that the months ahead will bring correction to the stock market, followed by a more-than-compensating rally later in the year. This outlook will adjust itself as the full impact of earnings season and whatever skewing impact international affairs have becomes clear.

The upshot for penny stock investors: The caveat needs to be made that market stats look back on the past and so offer no rational guidance as to the course of future events. On the other hand, the coincidence that both analysts and the calendar both line up to make for a bleak coming several months cannot be completely ignored, making this a good time to rejigger your position to be ready for larger gains as the weather turns cold again.