A new JPMorgan Chase & Co. (NYSE:JPM) research note says that markets may treat the Ukrainian situation “as a Lehman-style shock.”

The research note, reviewed by ValueWalk, said that while there are “fundamental differences between the current situation and the 2008/09 crisis,” if the market did experience such a shock it could lead to nearly a 50 percent loss in value in stock market index investments.  If the market were to be analyzed based on a forward price / earnings ratio multiple, investors might expect nearly a 40 percent decline.

Lehman Moment Russia Index

What is a Lehman Moment

Although the brief research note did not define the “Lehman Moment,” a phrase it highlighted in a heading in bold, the downfall of the investment bank was considered to have occurred due to unregulated derivatives that were eventually exposed as containing unknown toxic components.  The “Lehman Moment,” as defined by some, means a derivatives implosion that wipes out a company, taking the world economy with it.

Many hedge funds and market watchers have been warning about a derivatives implosion in the current market environment, as the estimated $700 trillion in derivatives exposure dwarfs the $72 trillion plus world economy and the capital reserves of the large banks and FDIC several times over.  A default on the derivatives exposure by a country such as Ukraine (or Argentina), if they trigger other defaults, could be a catalyst to the next “Lehman Moment.”

The research note did not mention derivatives specifically.  The author of the research, Alex Kantarovich, did not respond to a request for clarification.

Lehman Moment – Differences between current market and the Lehman era

When noting the differences between the current market environment and the Lehman era, the research note cited the price of oil holding up and saying the economic contraction may not be as deep as the Lehman Moment.

Lehman Moment DR RU performance

On the ground in Ukraine, the expectation is there will not be any easy resolutions to the conflict, which the report said will likely get “worse before better.” As a result, JPMorgan is recommending reducing exposure to Russia and stock segments that may be at risk.

Among the stock sectors are risk are financials, which the note said are “particularly badly exposed – both from a sanctions perspective and from the macro perspective.” The research note also said that economically sensitive consumer sector stocks could be hard hit, particularly if a trade war ensues.

“We again stress that the best defensive trade comprises exporters with no unwanted political affiliations as these also benefit fundamentally from the weaker ruble,” the research note concluded.