Russia/Ukraine Conflict And Implications On Investment Sectors

Russia’s invasion of Ukraine is horrible thing, we can't ignore the humanitarian aspects of this war. However, it will be unwise to ignore the implications for economies and the stock market. 

Despite its size, Russia's economy is very basic and relies mainly on energy exports. As far as GDP, the Russian economy only account for 3% of the global GDP. With that in mind, unless we are looking at a company with direct exposure to Russia, like BP, the large indices like the SP500 should be very minimally affected. In fact, the S&P 500’s direct exposure to Russia as far as a percentage of total sales is only approximately 0.1%. 

Having said that, energy prices is a whole different thing. 

Russia is responsible for 5 million barrels of crude per day which is about 12% of the global oil trade. Disruption in this sector will be felt globally quite seriously. Oil prices are expected to go up to 115-120 per barrel quite soon. 

Same on the commodities, as wheat, palladium and aluminum may see significant price spikes due to Russian sanctions and isolation. As far as supply chain interruptions, the U.S. doesn’t rely on Russia but the EU definitely does, but prices increases will be felt across the globe, including in the US. 

One more factor to take into account is defense. For 30 years, Germany has limited its military spending to a bare minimum. But now that is no longer the case, German Chancellor Olaf Scholz announced on Friday massive new defense spending of 100 billion euros this year and 2% of GDP going forward. This is just the start, as the rest of EU will follow Germany in this path.   

Thus, we can expect 3 sectors to see major upside as a result of the above:

1. Higher commodity prices 

2. Higher energy prices 

3. Higher defense / cybersecurity spending in US and EU  

Thus I think it would make sense in trying to find undervalued opportunities in these sectors. 

I don't pretend to focus (nor understand commodities and energy) but I understand tech. The defense and cybersecurity sector is driven by tech and I can see 4 interesting companies we can research further. 

NOC is up 23% in the past month. LMT is already up 18% in the past 30 days, but RTX is only up 13%, HII is only up 10% and BAH is only up 7.6% for the same period, which may warrant further research into these 3 defense stocks. 

However, the best opportunity here seems to be PLTR, with -9% drop in the past month but a nice 13% upswing in the past 5 days. 

Hope this gives you a bit more perspective.

Tom