The drums of war are beating as it seems imminent that Putin and Russia will invade the Ukraine. With human lives on the line it puts things in perspective, especially ones finances. Even Steve Jobs came to realize this in his dying days by stating, “In other eyes, my life is the essence of success, but aside from work, I have little joy. And in the end, wealth is just a fact of life to which I am accustomed.” So with no intent to minimize death, those of us who survive their own struggles and must move on need to wonder how this latest conflict will affect our finances. There’s no doubt that geopolitical events such as this will have an impact on the broader markets. The markets took a hit on Monday after the White House warned that an invasion could be imminent and experts say that the price of crude oil may continue to rise to as high as $120 a barrel.
Investors can look at ways to protect and position their portfolio if the Russian invasion goes ahead, as is widely expected. In the broader picture sanctions on Russia are likely to be put in place by the U.S. and the west. Goods and services likely to be sanctioned could be the import of any military hardware and software, semiconductors, smartphones, critical metals etc. There would also likely be financial sanctions that act to block western finance to Russia and Russian companies as well as US dollar transactions. In regard to asset classes in general, commodities that are derived from Russia will likely see their prices go higher. In addition to oil and gas, the Russian company Norilsk Nickel is the world’s leading palladium and nickel producer; the Russian company Rusal is a large global aluminum producer; and much of the world’s uranium comes from Russia, and Russian controlled companies such as those operating in Kazakhstan. In the broader picture one can look to the following asset classes as protection during times of conflict:
- Cash (U.S dollar, Japanese Yen, Swiss Franc).
- U.S Government bonds.
- Physical Gold, and quality gold producing mining companies.
- Rotating some money out of risky assets.
- Reducing exposure to Europe.
The bigger picture surrounding defense stocks lies not just in the inevitable attack on Ukraine, but the possible deleterious effects that would trickle down to China and its control of Taiwan. Cynically, defense stocks are one of the more logical places to consider putting your money at this time. Let’s take a look at a few that might make sense.
As are many of the other defense stocks in this category, Lockheed Martin is up almost 10% year to date as a direct result of the geopolitical tensions. Otherwise the stock has been relatively choppy during the last year. The upside that we are currently witnessing is positive for shareholders and reflects the overall industry as the U.S. security infrastructure attempts to fulfill its mission to rise up against threats to global democracy.
Among the defense stocks to consider amid rising tensions in Ukraine is Raytheon Technologies. Potential appreciation may lie here as it has only gained roughly 2% in the wake of the Russian conflict. Of particular import is Raytheon’s Javelin Weapon System. Marketed as an anti-tank guided munition that can be carried and launched by a single person, the Javelin offers serious implications for how the Ukrainians can defend themselves against a much larger enemy. The rub here for Raytheon is the actual effectiveness of the Javelin. There are a number of potential buyers on the sideline waiting to see the effectiveness of the Javelin in battle.
As one of the defense stocks known more for its civilian business than its underlying military applications, Boeing represents one of the sector’s blue chips. Like Raytheon mentioned above, there is potential upside in Boeing in that the stock is down roughly 5% over the trailing year. However, if you’re focused on the conflict in Ukraine, Boeing could be a discounted opportunity. According to a New York Times report, Boeing is now playing a significant role in responding to Russian aggression via its RC-135 reconnaissance plane.
When dealing with defense stocks amid tensions that could spill over into armed conflict, the natural instinct is to consider weapons systems and defensive platforms. L3Harris Technologies features a broad range of air, land and sea-based solutions, even ones that extend into space and the digital realm. The company has recently entered into an agreement in kind with the Ukrainian government to provide communications equipment that could be crucial in an upcoming battle. This could be a significant revenue boost for the company in the months and years to come.
Like many large companies, Northrop Grumman has suffered as a result of supply chain issues in the recent past. As with the rest of the economy, no one can say for sure when things will alleviate, but Northrop Grumman is still a pure play on war as a defense stock. In addition to its well-known stealth aircraft and others, the company creates state of the art autonomous aircraft. Its MQ-4C Triton drone specializes in real-time intelligence, surveillance and reconnaissance. The Triton can provide valuable information while keeping service members away from harm.
If you look at the Russian invasion of Ukraine in 2014 as a precursor for things to come you’ll remember that the Russian stock index fell roughly 11%, European indexes were down approximately 3.5%, while the Russian ruble cratered to a record low. U.S. markets were down a fraction of that, as money flowed from equities into US bonds, gold and safe haven currencies like the Swiss franc. If history repeats itself these numbers could easily manifest again.
