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updated: 8/29/2014 8:35 AM

JPMorgan sees 'Lehman moment' if Ukraine situation deteriorates

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Bloomberg News

Russia's equity markets may face a "Lehman moment" if the Ukraine conflict deteriorates further, according to Alexander Kantarovich, head of research for JPMorgan Chase & Co. in Moscow.

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"With the significant deterioration in the Ukrainian situation, markets may treat this as a Lehman-style shock," Kantarovich wrote in an e-mailed report today. "Revisiting the post-Lehman lows would imply downside of 50 percent from an index perspective."

Russia's ruble-denominated Micex Index has fallen 6.6 percent this year. The stock gauge posted the worst monthly drop in July since 2012 as the U.S. and the European Union escalated sanctions targeting Russia's $2 trillion economy after the downing of a passenger jet on July 17 over Ukrainian territory controlled by pro-Russian insurgents.

The Micex lost 67 percent in 2008, the biggest decline among benchmarks in the 30 largest stock markets, as Lehman Brothers Holdings Inc.'s collapse triggered a global recession and foreign banks cut credit. It rebounded by 120 percent in 2009, data compiled by Bloomberg show.

Kantarovich sees significant differences between the situation now and the 2008-2009 crisis because oil prices, Russia's chief export, are holding up and an economic contraction "may not be that deep."

The global economic crisis crimped demand for commodities, sending Urals as low as $32.34 a barrel on Dec. 24, 2008. The decline was a 77 percent drop from a high of $142.50 in July that year. Crude is trading at $94.96 a barrel today in New York.

Financial Stocks

The bank recommends reducing Russian investments because "markets may no longer assume a quick and easy resolution of the conflict and 'worse before better' seems a likely sequence."

Financials are "particularly badly exposed" by sanctions and the broader economic situation, he wrote. The best defensive plays are exporters with no "unwanted political affiliations" as they will benefit from a weaker ruble, he said.

Kantarovich, who joined JPMorgan from MDM Bank in 2007, declined to comment further by telephone.

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