With the invasion from Russia into the territory of its smaller neighbor, and former colony of Ukraine, the rumors of the invasion that were already affecting the market, can end up tossing the prices of assets back and forth.
This situation falls under the ambit of geopolitical risk, which carries its own set of dynamics distinct from the usual challenges when it comes to investing, such as economic and corporate news or valuations. With geopolitical risks, the market's short-term direction can change in a flash, based on the latest headline.
As an investor, the utmost question on your mind should be how best to position your assets to reduce the risk to your portfolio. Here are some sectors you should consider seeking exposure to in the event of this recent geopolitical risk.
Russia is Europe’s largest gas provider, typically supplying 30-40% of the continent’s gas demand via its pipelines.
However, there is a potential risk that any escalation could result in sanctions on Russia’s Nord Stream 2 (NS2) pipeline, which would potentially end up curtailing flows to Europe for an indefinite period, exacerbating the tightness in European gas markets.
Investors looking to hedge can think about adding tactical exposure to energy companies, which should benefit in the event of higher commodity prices. Companies that deal with oil or natural gas present good buying opportunities.
One good thing about this strategic move is that aside from the Ukrainian crisis, the world is still battling inflation and higher energy crises. As such, there are still macro factors that would move energy prices in the long term apart from the fear of a Russian invasion.
We should expect a flight to haven assets now that the tension has become full-blown war.
Not every investor would want to risk having their assets in a volatile market. Yet many more do not know how to position themselves because of short-term volatility swings in the market.
These situations make a perfect condition to seek safety rather than embrace risk. As such, Gold which has long been regarded as a haven, would be a good bet for investors hoping to preserve the value of their assets.
Furthermore, with inflation rising and the federal reserve looking to tighten interest rates, it also makes sense to buy Gold for the long term. Investors can place bets on the gold spot market, gold mining companies, or gold futures.
Russia has never shied away from using cyber warfare against its perceived enemies.
Russia has organized several Distributed Denial of Service (DDoS) attacks as a part of its cyber-warfare against other countries. Prominent examples are the 2007 cyberattacks on Estonia and similar attacks on Georgia and Azerbaijan in 2008.
There is no ruling out that the Russian government may use cyber warfare as part of its military campaign against Ukraine. This would be bullish for cybersecurity stocks as there would be more need for their services.
Investors should expect a roil in metals markets now that tension between Russia and Ukraine has become full on war.
However, the price action among metals will not be uniform, so investors should conduct due diligence and understand how the geopolitical situation would affect the price action of each metal.
Russia is a major producer of aluminum, nickel, and Platinum Group Metals (PGMs) which consists of platinum, palladium, rhodium, ruthenium, iridium, and osmium. Russia is estimated to hold around 10% of the world's copper reserves and 43% of the world's mined supplies of palladium.
Investors can expect a sharp rally in these metals now that invasion plans have gone through. Sanctions from the United States and its allies would put further bullish pressure on these metals because of the possible short squeeze from Russia in response.
As such, the best way for investors to play this is by investing in companies that deal with these metals such as aluminum companies. EV battery stocks also offer indirect exposure because of their exposure to copper.
Consumers have faced high food costs since the pandemic began.
Food prices, as measured by the consumer-price index, rose 3.4% annually in 2020. Given that Ukraine is a food bowl for Europe, any significant disruption to the Ukraine agricultural sector could force up prices.
In 2019, exports from Russia and Ukraine were more than 25% of the world’s wheat.
This implies that now that Russian tanks have crossed the border, agriculture stocks will receive a boost due to the anticipated shortages from supply chain disruptions. Investors can keep an eye on companies that deal with agricultural products directly and indirectly.
Lastly, defense military contractors would be perhaps the biggest winners of a war between Russia and Ukraine.
This is obvious as all parties involved in the looming political debacle in eastern Europe (U.S, NATO, Russia, and Ukraine) have been stockpiling weapons to carry out their warfare plans. You can invest in companies that manufacture weapons or provide military services to the government.
Just like all geopolitical crises, the Russia-Ukraine situation poses serious risks for investors.
However, history shows that risks from wars on global financial markets are usually short-lived, but they also present buying opportunities for disciplined investors.
While it is good to have an assessment of the situation before making an investment choice, it is appropriate to keep the long term in view and avoid any knee-jerk reaction that would hurt your portfolio in the long run.
Photo by Michael Steinberg from Pexels
March 30, 2023