How Markets React to War - InvestingChannel

How Markets React to War

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Opportunities in Russian Stocks

In our main story below, we explain why different sectors reacted the way they did to the news of Russia invading Ukraine.

A key question many people now wonder is whether ETFs like VanEck’s RSX, which invests in Russian equity markets, is about to stop trading.

At the moment, sanctions do not stop this or other similar ETFs from trading.

That can change. But so far it has not.

For those of you unfamiliar with the ticker, the RSX invests in stocks tied to Russia. Americans cannot own these companies directly.

Due to the conflict, the RSX has plummeted from over $33 in October to near $14 today.

This creates an interesting opportunity for investors willing to take on some risk.

You see, a huge portion of Russia’s economy is tied to energy. And right now, those commodities are trading at sky high prices.

If you believe that the conflict will resolve at some point in the near future, then the RSX ETF, with its heavy weighting towards energy, becomes vastly undervalued.

Consider the current dividend yield of more than 6%.

Now, there are plenty of risks here. Governments could drop sanctions that stop the ETF from trading or other similar problems could arise.

But, the risk/reward here creates a unique opportunity for those interested.

World News

How Markets React to War

Key Takeaways

  • Markets followed typical global conflict protocols with stocks selling off and bonds rallying.
  • High growth tech stocks fell the most to start the day along with financials.
  • Unlike most conflicts, energy stocks rose as already tight supplies were expected to get worse with Russian exports cut off.

Throughout history, global conflicts drive similar market behaviors.

Here’s how this market measures up.

Risk Assets Drop

Stocks are considered risk assets. Within the broader stock market, you have riskier parts such as high growth technology stocks, small caps, and the like.

Today was no different with most sectors declining out of the gate.

Sectors considered ‘safer’ such as consumer staples (XLP) and utilities (XLU) were down less than tech sectors like semiconductors (SMH).

Yet, the most beaten down stocks rallied the most as an oversold market finally found willing buyers in the short term.

Safety Trades Pop

Typically, investors hide in government debt, the U.S. dollar, gold, and the like as ‘safety’ trades. They’re seen as lower risk since they’re backed by either government guarantees or physical assets.

In the case of bonds (TLT) that reverses a multi-month downward trend driven by investors expecting higher interest rates. Higher interest rates from the Fed drive bond prices lower until their yield (kind of like their dividend) pays a better rate.

That led financial stocks (XLF) like JP Morgan (JPM) to drop more than other sectors. These companies had rallied ahead of Fed rate hikes which help drive higher profits through greater net interest income.

Energy is the Outlier

The one difference here has been energy.

Usually, energy commodities drop as investors expect demand to shrink in the face of conflict. 

This time, we saw oil and natural gas prices skyrocket. Markets already short on inventory expected the conflict and subsequent sanctions to draw down on stock given how much Russia supplies to the world.

That created technical buying in Crude oil futures that sent them over $100 per barrel for the first time since 2014.

It’s not inconceivable that we could see prices eclipse the 2008 highs near $150.

The Bottom Line: Markets are acting normally as they would during most geopolitical conflicts.

Historically, investors are better off assuming markets will return to normalcy than collapse. 

In fact, the only time in recent history where any conflict actually drove down markets was the September 11th attacks that shut down financial markets in NYC.

Ergo, use selloffs to look for opportunities in stocks you want to own. This is a key reason you keep a watchlist of ticker symbols to keep an eye on.

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