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Which stocks could benefit from the Russia/Ukraine conflict?



With war raging in the Ukraine, which stocks and sectors offer a safe harbour for investors?

Source: Bloomberg

Last week when the Russians invaded the Ukraine, FTSE 100 investors took fright and the index fell by almost 4% in one day. The index fell by 3.9% to 7,207 in its worse day’s performance since the height of the Covid-19 pandemic in June 2020. Around £77bn of value was wiped off the index. Other markets followed suit, with the DAX down 3.9% and the CAC40 down 3.8%. However, the following day the markets rebounded and the FTSE 100 rose by 3.9%, boosted by a strong performance by banks and insurers.

"The markets are telling us that the sanctions aren't particularly dramatic relative to what they could be," said Russ Mould, investment director at AJ Bell. "Some of it is people looking to buy on the dip and taking the alleged advice by financier Nathan Rothschild that you should buy on the sound of cannons and sell on the sound of trumpets."

It might not seem logical but, typically, stock markets have actually performed well during wartime. Research by Mark Armbruster, the president of Armbruster Capital Management, into the period from 1926 to July 2013 found that stock market volatility actually fell during times of conflict. "Intuitively, one would expect the uncertainty of the geopolitical environment to spill over into the stock market,” he said. “However, that has not been the case, except during the Gulf War when volatility was roughly in line with the historical average.”

When investors take fright and sell, this can also mean a buying opportunity for good quality stocks. Here are some sectors and stocks that may be a good investment during the current conflict in the Ukraine.

Defence stocks can offer a safe haven

An obvious sector to look at during wartime is the defence and aerospace industry. This is likely to benefit in general from positive market sentiment and the flight to value stocks, if not actual additional sales. Shares in BAE Systems and Airbus could be worth looking at. BAE shares remained relatively resilient during last week’s market sell-off, rising 5.7% after posting strong full-year profits. Sales rose 5% to £21.3bn in 2021, while underlying earnings before interest and taxation (EBIT) grew 13% to £2.2bn and free cash flow to £1.8bn (from £1.3bn last year). BAE is one of the top dividend payers in the FTSE100, with a dividend yield of 4% and has a strong order book of clients including the US military, British Navy and Saudi Arabia.

Chief executive Charles Woodburn told investors at the results last week that the company’s “defence and security capabilities” remained “highly relevant in an uncertain global environment with complex threats”. While BAE won’t benefit directly from the Russian/Ukraine conflict, it boasts a strong order book. Similarly, European helicopter and aircraft supplier Airbus has reinstated its dividend and recently posted record income.

Gold – investor flight to safety

Gold usually performs well in times of uncertainty and conflict because it tends to hold its value while currencies fluctuate. The Russian rouble, for example, has plunged to an all-time low against the dollar – offering opportunities for currency traders. Investing in early stage gold mining stocks can be risky, however, and the larger mining companies are facing issues such as dealing with rising cost inflation. Buying an exchange traded fund (ETF), which track the price of a benchmarked index, such as the Gold Linked Exchange Traded Fund, could be a good low cost way to follow this theme.

Energy stocks benefit from record prices

Energy prices have hit record highs since the Russian’s invasion of the Ukraine began. Future European gas prices jumped 50% and oil prices hit a seven-year high of $113 a barrel on Wednesday. The energy sector is a tricky one to navigate as some companies, including Shell and BP, have major exposure to Russia. Both companies are currently trying to exit their businesses in Russia, with BP putting its Rosneft stake up for sale. It’s unclear what the financial hit will be and how long it will take to find a buyer. However, BP shares are up 5% today and oil and gas and energy companies should benefit from the hike in prices in general.

Technology is the new safe haven

Typically, in a wartime scenario it would make sense to recommend a consumer staple stock, such as a supermarket or food producer. However, all of these companies are currently battling with soaring input costs as inflation has hit a 30-year high. Instead, some professional investors think high quality telecom and technology stocks may be a better choice. Microsoft shares look like a good solid option in the technology space, down from their previous year highs of $340, at $296.17. Meanwhile, BT could be another opportunity in the telecoms space. Berenberg Bank recently increased its target price on BT shares from 200p to 225p. It argues that at the current price of 177.55p, the shares look undervalued as the company is in growth mode and should benefit from built-in inflationary hikes to customer contracts.

News publishers - war means more clicks

Publishers are dealing with rising wages and inflationary costs, but a major conflict means more news coverage, more reader interest and more clicks – as was particularly seen with news publishers during Donald Trump’s presidency. With Daily Mail and General Trust now taken private, it may be worth keeping an eye on Reach PLC shares. The former Trinity Mirror, owner of The Mirror and the Daily Express newspapers and websites, posted encouraging full-year results this week, with operating profits up 9%. It is slowing growing its digital revenues away from its dying print newspaper sales. The shares dipped after it warned that higher printing and energy costs would create a ‘modest’ drop in operating profits this year, but are worth looking at, at 157.6p.

While it can be tempting to sell out and take profits during a major conflict, it can often be a mistake as markets bounce back. Price dips in good quality stocks can also offer a buying opportunity in the long run.

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IG Analyst | Publication date: Friday 04 March 2022 04:01


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