Are stock pickers right to go on the defensive now?
11:09, 7 March 2022
As the conflict in Ukraine continues, so investors – whether rightly or not – are mostly considering safe havens.
Surprisingly, Russian stocks have not taken a pounding, but then they represent less than 0.5% of the MSCI AC World and 3% of the MSCI Emerging Market indices.
Of course, the knock-on effect is that the selloff becomes much broader as investors look to protect themselves from global companies that are directly or indirectly affected by events in Ukraine and the financial impact in Moscow.
Commodity and mining plays
Perhaps not surprisingly, among the best performers of late are commodity/mining stocks – the top 10 on the FTSE 350 (that’s the FTSE 100 and FTSE 250 combined), are:
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- Antofagasta (ANTO) – +23%;
- BAE Systems (BA.) – +18%;
- Fresnillo (FRES) – +18%;
- Hochschild Mining (HOC) – +18%;
- QinetiQ Group (QQ.)– +17%;
- Energean Oil & Gas (ENOG) – +12%;
- Oxford Instruments (ORD 5p – OXIG) – +12%;
- Glencore (GLEN) – +11%;
- Centamin (CEY) – +11%; and
- Drax Group (DRX)– +10%.
Defence and security stocks
Danni Hewson, financial analyst at AJ Bell, says defence has become priority number one as the situation in Ukraine becomes ever more bleak.
For Hewson, a few of the interesting stocks right now include some defence stocks: “Cyber-security powerhouse Darktrace (DARK) has seen its share price surge by 36% in the past 11 days.
Says Hewson: “More traditional defence names such as Chemring Group (CHG), QinetiQ Group and BAE Systems are also proving popular with investors considering which sectors might benefit from the current situation.
“With the boast that 90% of its oil and gas production is UK-based, Harbour Energy (HBR) is benefiting both from rising commodity prices and from the shift away from Russian oil and gas supplies, and then there are all those miners that will benefit from surging prices.”
While tactical shifts in stock selection might pay off, or at least reduce losses, there are no guarantees. As Hewson explains, investors are in an impossible position: they’re finding it impossible to price in the fallout from the crisis because the fallout is unpredictable and is constantly shifting.
“History tells us that market volatility during conflict will ultimately smooth out once that conflict ends,” she comments,“but what will the world look like once this chapter is over? How will the global economy have shifted?”
Hweson adds: “Without a crystal ball, it’s impossible to make many smart moves. Timing the market very rarely ends well, and most investors should refrain from knee-jerk selloffs they may end up regretting.”
Diversifying equity portfolios
Sophie Lund-Yates, lead equity researcher at Hargreaves Lansdown, takes a similar line. She insists this is the most jittery the market has been since the pandemic; much like that crisis, the full impact of the Ukraine tragedy is difficult to predict.
Says Lund-Yates: “To that end, now is a textbook example of the importance of being diversified – not having all your eggs in one basket. A sturdy investment portfolio should include defensive options, which aim to offset some of the volatility in times such as these. Moving to include such names in uncertain times is no bad thing.”
However, Lund-Yates stresses the importance of getting the balance right and not simply reacting based on panic, as: “Doing this risks crystalising losses at the bottom of the cycle. Overtrading is one of the most common and damaging investing behaviours in uncertain times.
She argues that the intra-day movements of the FTSE don’t hold too much importance at the moment: “The market is unsure where it’s going to settle while the crisis continues. Continued volatility should be expected in the coming days if not weeks.
“The more important aspect is the longer-term picture and owning investments you believe have the firepower to stomach ups and downs.”
Copper stocks as inflation hedge
Suzanne Hutchins, portfolio manager of the BNY Mellon Real Return fund, has a broad mix of cyclical and defensive names in her portfolio right now.
These include CME (CME) and German industrial gas company Linde (LIN). She also has exposure to copper miners to act as an inflation hedge. Sustainable plays like The Renewables Infrastructure Group (TRIG) and Greencoat UK Wind (UKW) also feature among her largest positions.
Stefan Kreuzkamp, chief investment officer (CIO) and head of the investment division at DWS, says that European assets are at the core of the storm.
Consequently, he sees safe havens (US equities, Japan, Swiss market, Health Care, Consumer Staples) and oil sensitives (UK, energy sector) as likely to outperform, while cyclical sectors and Europe ex-UK are likely to face a more difficult environment.
“Eurozone financials could be hurt by delayed ECB [European Central Bank] hikes and disentanglement of relations with the Russian financial system. Investors will adapt their risk premium for single stocks depending on their direct or indirect exposure to Russia and Ukraine, either as an end market or as a source of supply,” says Kreuzkamp.
Dan Boardman-Weston, CIO at BRI Wealth Management, points out that as of today, less than 10% of the FTSE 350 index is in positive territory year-to-date. He says the main beneficiaries of this volatility have been energy, mining and defence companies, with many companies in these sectors up well over 10% year-to-date.
“It’s quite understandable that these sectors have held up well, given surging commodity prices and an anticipated increase in defence spending across the world. We continue to have exposure to commodity producers within our portfolios and have been pleased with the defensive qualities that they have exhibited during this volatility.
“We expect these companies will continue to do well in the short term, given the scope for further increases in the price of commodities if further sanctions are imposed on Russia and the knock-on impact this will have on supply.”
Longer-term views
Looking at the longer term, though, Boardman-Weston is less optimistic about these companies given the shift to cleaner energy sources, which may be accelerated given the world is realising how reliant we are on Russian oil and gas – and the implications of this.
Boardman-Weston’s focus is very much on the long term; he argues that some of the companies and sectors that have fallen sharply this year look very good value at the moment.
“Many of these companies don’t operate in Russia/Ukraine and aren’t impacted by a rise in interest rates, yet have fallen by over 30% in some cases. This seems irrational, given that the conflict in Ukraine and rising interest rates aren’t too likely to tip the world into a recession.
He concludes: “We are getting closer to the point where we will recycle capital out of defensive assets and equities that have held up well recently, and will seek to invest it into high-quality companies that are being indiscriminately sold off at the moment.
“It’s a scary moment for the world and for stock markets, but markets will recover and we’re focused on the long-term opportunities that are arising from the recent volatility.”
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