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What does the Russia-Ukraine conflict mean for investors?

What does the Russia-Ukraine conflict mean for investors?

Global markets typically rebound from war and disaster, and they are likely to do so this time, too. But Russia’s nuclear arsenal raises the risks beyond calculation. 

History tells us that the worse things get, the more valuable cash and Treasuries seem. And it also says that Cold Warriors who stuck with the stock market ended up with big fat portfolios.

That is likely to be the case in the future, too. But it is impossible to be certain of it.

How to use this guide

  1. Check Russia-Ukraine's impact on the broader market.
  2. Understand how stock markets are affected by armed conflicts.
  3. Open a trading account to get access to our platform.
  4. Get your investments list. We have all of them.

Russia-Ukraine's Impact on the Broader Market

The broad selloff in stocks accelerated, adding to last week's losses, as Russia's invasion of Ukraine injected fresh uncertainty into markets already under pressure from the threat of rising interest rates, sizzling inflation, and continuing supply-chain bottlenecks.

Commodities, Safe-Havens soar, fastest pace in 27 years

Not all stocks have been falling, of course. Rising oil and gas prices have bolstered the energy sector and shares of energy companies. The international crude oil benchmark Brent rose above $100 a barrel, the highest price since 2014.

Brent Oil Capex
Source: CAPEX WebTrader

It is likely to soar higher, especially if Russia mounts a full-scale invasion and, in return, faces harsh financial sanctions by the United States and its allies. Hence, oil and gas stocks would be in the limelight yet again.

Russia is a key producer of crude oil and natural gas, with pipelines feeding many parts of Europe. If Russia were to shut off the spigot or have its oil infrastructure damaged, it could lead to higher energy prices. Interruptions to the ports around the Black and Baltic Seas could also create even bigger shipping headaches and lead to food inflation as grains and other staples remain stuck at sea.

Oil prices are already painful for consumers

They are reflected in the most salient marker of inflation in the United States and EU.

Russia is not just a heavyweight in energy production, where it ranks third in petroleum (behind the United States and Saudi Arabia) and second in natural gas (behind the United States), according to the U.S. Energy Information Administration.

It is also one of the world’s most important producers of minerals and metals like platinum, nickel, aluminum, cobalt, copper, gold, and diamonds. Prices of these commodities have been rising, but that is the least of it. Shortages of Russian commodities could cause further supply-chain bottlenecks in the United States and Eurozone.

Russia ranks No. 1 in the production of palladium, for example, a critical component of the catalytic converters required to reduce emissions in gasoline-powered cars, whose rising prices have already contributed to a surge in American inflation. Much of Russia’s palladium is mined by Norilsk Nickel, which could be included on Western sanctions lists.

There are a variety of ways that you can get exposure to the price of commodities

The steps you will need to take to buy and sell commodities will depend on whether you are trading futures and spot prices or investing in stocks and ETFs.

How the Stock Markets are Affected by War

History tells us periods of uncertainty like we are seeing now is usually when stocks suffer the most. In 2015, researchers at the Swiss Finance Institute looked at U.S. military conflicts after World War II and found that in cases when there is a pre-war phase, an increase in the war likelihood tends to decrease stock prices, but the ultimate outbreak of war increases them. However, in cases when a war starts as a surprise, the outbreak of war decreases stock prices. They called this phenomenon "the war puzzle" and said there is no clear explanation why stocks increase significantly once war breaks out after a prelude.

Similarly, Mark Armbruster, the president of Armbruster Capital Management, studied the period from 1926 through July 2013 and found that stock market volatility was lower during periods of war.

Part of the reason for the calm may lie in the changing structure of global oil markets and how the U.S. economy has become less vulnerable to energy price swings. Part of the reason may be purely psychological. Today’s investors have seen the stock market recover from both 9/11 and the Great Financial Crisis, the greatest geopolitical and economic shocks of our time. This makes it easier for investors to shrug off other events.

Global markets usually weaken as wars approach, strengthen long before wars end and treat human calamity with breath-taking indifference.

That’s been a common historical pattern, anyway. But Russia’s nuclear arsenal raises the risks beyond calculation.

However, an armed conflict may provide further opportunities to invest in specific sectors and individual stocks that might benefit the most, as well as speculating on Oil and Gas spot and futures prices.

How to Invest as the conflict in Ukraine intensifies

So, what to do if the guns start firing?

Simple.

Get out your investments list. The threat of a war in Ukraine has shaken the stock market in recent weeks. The turmoil could pave the way for some sectors to see outsize benefits.

Geopolitical tension will manifest itself on the negative side in the form of higher commodity prices.

We are going to look at different asset classes that may surge in times of armed conflict.

1. Commodity Stocks and ETFs

Commodity Stocks & ETFs

Economic sanctions are likely to drive up prices at a time when the last thing the U.S. or other developed countries need is more inflationary pressures. Most directly affected would be the European Union given its heavy reliance on Russian energy products, but it would drive up energy prices elsewhere as well.

Although investors could consider playing a continued run-in oil and gas prices via individual energy stocks and energy ETFs (Exchange Traded Funds) that provide diversified exposure to the sector. They spread out an investor's bets across multiple stocks, and, in many cases, across multiple industries within the energy complex.

Oil Stocks to consider as Crude prices surge

You can get indirect exposure to the commodity market by buying shares of companies that are involved in the mining, extraction, growth, or harvesting of any type of commodity.

Energy ETFs for rising Oil & Gas prices

Exchange-traded funds (ETFs) are investment instruments that hold an asset type or basket of assets, such as commodities. Here, we explore some energy ETFs that are extremely sensitive to energy-price movements.

Oil and Petroleum blend of shares

Oil and Petroleum ThematiX is a basket of selected shares from large NYSE-listed Oil Companies. The weight of each share, (percentage allocation) to the ThematiX is determined based on their Market Capitalization. These Companies' shares can be traded as a single CFD product with the Oil and Petroleum ThematiX and is comprised of a group of shares as below:

  • Chevron 20%
  • Exxon 26%
  • British Petroleum NYSE 12%
  • Sinopec 1%
  • Occidental 3%
  • Valero Energy 4%
  • Marathon Oil 1%
  • Schlumberger 5%
  • Holly Front 1%
  • Conoco Phill 6%
  • Petro China 8%
  • Total SA 13%

2. Cybersecurity Stocks

Cybersecurity Stocks

Russia has emerged as a powerful force in cyberwarfare over the past decade. Analysts believe that Moscow could look to leverage this capability in a wider conflict to target Ukrainian data centers, networks, sensitive data, and other digital vulnerability points such as in infrastructure.

With Ukraine conflict now front and center and poised to widen, we can expect a surge of cybersecurity attacks from Russia state-sponsored organizations that could change the game for U.S./European enterprises and governments over the coming months.

Here are some stocks that are well placed to pick up business from the development.

  • Palo Alto Networks (PANW), the global cybersecurity leader, reported strong demand for its security software in its latest quarterly results.
  • Crowd Strike (CRWD) is a leader in cloud-delivered, next-generation services for endpoint protection, threat intelligence, and response.
  • Fortinet (FTNT) delivers high-performance network security solutions that protect your network, users, and data from continually evolving threats.
  • CyberArk CYBR), a world leader in Identity Security, secures secrets used by machines and users to protect traditional and cloud-native apps.

3. Safe-Haven Assets

Safe Haven assets

A safe-haven asset is a financial instrument that typically retains its value – or even increases in value – while the broader market declines. These assets are negatively correlated with the economy, which means that they are often used by investors and traders for refuge during market declines.

Popular safe havens can change over time, so it is important to keep up with investment trends. However, there are a few safe-havens that have remained favorites over the years, including:

Gold

Many consider the decision to buy gold a behavioral bias, based on gold’s history of backing currencies and as a store of value. The theory goes that because gold has historically been considered a safe haven when there are signs of a significant market collapse, investors swarm to the precious metal. Gold as a safe haven has become a self-fulfilling prophecy.

The most popular ways to invest in gold and gold-related assets are through:

Currencies

Safe haven or safety currencies depreciate in times of optimism and appreciate in times of pessimism like other safety assets that are in demand when markets are fearful, such as investment-grade bonds.

These are:

  • US Dollar: For over 50 years, the US dollar has been one of the most popular safe-havens during economic downturns. It exhibits a number of safe-haven characteristics – most crucially, it is the most liquid currency on the forex market.
  • Japanese Yen: The yen earned its reputation as a safe haven due to Japan’s high trade surplus versus its debt. The value of foreign assets held by Japanese investors is far higher than Japanese assets owned by foreign investors – this means that when markets become ‘risk off’, money moves out of other currencies and back into domestic markets, which strengthens the yen.
  • Swiss Franc: A study by the central bank of Germany, Deutsche Bundesbank, found that the Swiss franc often appreciated when the global stock market showed signs of financial stress. Common reasons that investors favor the Swiss franc as a safe-haven currency include the political neutrality of the Swiss government, the strong Swiss economy, and their developed banking sector.

Russian Ruble hits record low against the US Dollar as the country’s military invaded Ukraine Thursday.

USD Ruble Capex
Source: CAPEX WebTrader

Government bonds

Government bonds are a fixed-term ‘I owe you’ from a government, which have periodic interest payments – treasury bills and notes are a type of bond. The only difference between them is the amount of time before you will be reimbursed in full. Treasury bills have maturities of a year or less, while treasury bonds can have maturities of ten years or more.

Investors tend to have more confidence in bonds issued by governments of developed economies – the most popular are:

Defensive Stocks

Investors will often seek to diversify their portfolios by including defensive stocks. These are the shares of companies that are perceived as consumer staples, so their products are needed regardless of the state of the economy. These can include food and beverage producers and utility companies.

When an economy is doing well, investment tends to flow into ‘cyclical stocks’, which are the companies that produce non-essential items. Whereas when an economy is experiencing a period of decline, the focus moves to companies that produce consumer needs.

Like safe havens, investors tend to start piling into defensive stocks when bearish sentiment emerges. Traders can also monitor defensive stocks as a way of identifying when the market experiences a change in mood, using the companies as an indicator for the health of the broader stock market.

4. Commodity CFDs

Commodities CFD

Commodities trading works in the same way as speculating on any other market, in that buyers and sellers come together to exchange goods. The only difference is that commodities can be bought and sold at a current and future price.

There are two ways you can trade oil and other commodities:

  • Oil spot prices represent the cost of buying or selling oil immediately, or ‘on the spot’ – instead of at a set date in the future. While futures prices reflect how much the markets believe oil will be worth when the future expires, spot prices show how much it is worth right now.
  • Oil futures are contracts in which you agree to exchange an amount of oil at a set price on a set date. They are traded on exchanges and reflect the demand for diverse types of oil. Oil futures are a common method of buying and selling oil, and they enable you to trade rising and falling prices.

While futures prices reflect how much the markets believe a commodity will be worth when the future expires, spot prices show how much it is worth right now – or ‘on the spot’.

Our proprietary ‘spot’ prices are based on the two nearest futures on the market in question. They reflect the underlying market but with no fixed expiries, making them suitable for both beginners and experienced traders.

Once you have created your account and logged in, you can trade on commodities spot and futures prices by:

  • Searching for the commodity market you would like to trade – e.g., ‘oil’
  • Selecting the instrument in the left-side panel
  • Choosing your trade size and opening your first position
Oil Trading CAPEX
Source: CAPEX WebTrader

With CFDs (contracts for difference), you can speculate on commodities price movement without taking direct ownership. The first benefit is that you can trade in either direction by going long (open buy position) if you think the price will go up or going short (open sell position) if you think the price will go down.

It’s essential to understand that CFDs are leveraged products. When you decide to trade commodities CFDs, you do not need to deposit the full value of that position, and you only need to deposit a margin.

However, this leverage can go both ways, turning into a profit or a loss. If you’re new to CFDs, you can practice on a risk-free demo account before you start trading real money.

You might want to trade commodities with CFDs if:

  • You are interested in speculating on the underlying price of commodities
  • You want to trade rising and falling markets – going long and short
  • You want to leverage your exposure
  • You want to take shorter-term positions
  • You want to hedge your portfolio
  • You want to trade without owning the underlying asset

Conclusion

Do you notice some consciously absent classes/sectors of stocks? Such as high-risk plays? So-called "undervalued" tech stocks? Zero-Dividend stocks? Nanocaps and companies that don't have a positive EPS (Earnings Per Share)?

Not this time.

We believe the way to go currently is to focus on safe-haven assets, real capital/income flows, and defensive plays. We are talking infrastructure. Water. Power. Food. Products that have a timeless value, including such things as luxury goods, have proven to hold up extremely well in crises.

Thông tin/nghiên cứu này được thực hiện bởi Miguel A. Rodriguez và không tính đến các mục tiêu đầu tư cụ thể, tình hình tài chính hoặc nhu cầu riêng của bất kỳ người cụ thể nào. Nhà phân tích nghiên cứu chịu trách nhiệm chính về nội dung của báo cáo nghiên cứu này, dù một phần hay toàn bộ, xác nhận rằng quan điểm về các công ty và chứng khoán của họ được thể hiện trong báo cáo này phản ánh chính xác quan điểm cá nhân của mình và do đó, bất kỳ người nào hành động dựa trên báo cáo này phải tự chịu toàn bộ rủi ro.

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