Russia’s invasion of Ukraine has catalyzed some significant market drawdowns as fear and souring market sentiment clip valuation multiples for US stocks once again.
The market’s fear gauge, aka the VIX, has officially held above 30 for its longest trading period since June of 2020, while its 200-day moving average makes a material reversal higher for the first time since the pandemic sell-off began 2 years ago (swinging from 18.50 at the beginning of the year back up to 20). Fear has officially infected the US stock market, and opportunities for prudent long-term investments are ripening.
Despite 2022 earnings projections holding strong (even slightly tilted up), the geopolitical uncertainty surrounding the #1 and #2 European countries by area going to war has investors flying to the safety of US Treasuries, while headline chasing trading bid up those domestic risk-on public equities that stand to benefit the most from this unfortunate turn of events.
Russia’s invasion of Ukraine has accelerated a much more profound and withstanding implication to our global economic structure than fear-mongering headlines about an impending World War III would suggest, which is the reversal of globalization (aka nationalization).
With stocks now trading at a relative discount (many -10% or more off highs), the time to start investments in the long-term beneficiaries of this momentous economic development is now. Let’s dive into the underlying catalyst of this systemic global shift towards a new normal, then highlight the technologies and related stocks in focus.
Reversing Centuries of Globalization
The centuries of progressing interdependency of our world economy has allowed individual nations to leverage their respective core competencies (where they possess a relative competitive advantage), whether that be farming, mining, banking, innovation, tourism, or any combination of economic drivers, to increase total output, promote global economic growth, and maintain low prices (basis macroeconomics).
After centuries of advancing globalization, the world’s superpowers are now looking toward advancing technology to become self-sufficient in as many ways as possible. This global move towards nationalization/self-sustaining practices was incited by the Trump administration’s recognition of unfair trade practices, which initiated the much-needed trade renegotiations with China (despite your personal opinions on his regime).
Biden’s regime has doubled down on its tough trade talks with its Asian counterpart. In the wake of the latest Russia embargos (despite the US’s <1% GDP reliance on the nation), Biden publicly stated his administration’s intent to onshore US operations (similar to the prior incumbency’s move to bring American jobs back) to protect US posterity against the geopolitical risk of overdependency on any other nation.
There are several concerning implications surrounding this type of broad nationalization declaration, including how would this costly mass corporate repatriation be funding, would the jobs created by mass corporate repatriation outweigh the higher costs to the consumer, or would this entire process be a systemic shift toward automation (which would carry significant upfront costs)?
All the above point to elevated consumer prices, meaning that any legislative action towards these goals would have to wait till inflation normalizes back towards the Fed’s 2% target.
How To Trade Reverse Globalization
The Eastern conflict has investors looking internally towards several domestic market niches that stand to benefit the most: cybersecurity, oil & gas E&Ps, clean energy, aerospace & defense, and cryptocurrencies. The best-positioned players in these spaces have experienced an outsized bid in the recent sessions, but whether these respective rallies have room to run is dependent on the underlying assumptions.
Let’s discuss why each of these market niches has been receiving a disproportionate amount of love in the face of this Eastern conflict.
Cybersecurity is not just a clear-cut winner of this unfortunate invasion but a long-term winner where valuations are less of a concern than market share functionality as investors realize how essential this technology is for the future of our rapidly digitalizing economic structure. I have been trading CrowdStrike
CRWD
, what I view as the best-in-class AI-power cloud-incepted cybersecurity platform on the market, call options over the past few days to take advantage of the momentum here. This space has a lot of room to rally in the coming months.
Sustainable energy stocks have become a sector of outsized interest since the pandemic began as the existential threat of mortality naturally leads humans to focus on the health of our planet. The Russia-Ukraine situation highlights that the global economy’s reliance on oil & gas is also dangerous from a financial standpoint as its long-term supply starts looking thin.
Many clean energy stocks have been crushed in recent months as interest rate expectations took flight, but the latest energy crisis in Europe catalyzed a much-needed reversal for these underappreciated equities.
If you’re looking to invest in new economy energy companies, I would do so with the iShares S&P Global Clean Energy ETF
ICLN
, which provides you with an immediately diversified bet on humanity’s future source of power. As a long-term play, this basket of stocks looks ripe for the picking right now.
Defense giants like Lockheed Martin
LMT
, Raytheon Technologies
RTX
, Northrop Grumman
NOC
, have received double-digit gains since the invasion began as investors assess the potential increase in order flows that this latest geopolitical dispute could generate if it escalates further. I wouldn’t be chasing this rally, as much of the potential short-term upside has largely already been priced in. I doubt that the US will materially increase their already massive defense budget, which funds most of these companies’ operations.
Cryptocurrencies are the most enlightening winner of the bunch as the bid here illustrates the recognized shortcomings of the world’s 180 distinct fiat currencies. The notion that a global superpower’s currency like the Russian Ruble can lose 30% of its value in one week because other governments decided to put sanctions on the country is a scary thought (even if these sanctions are more than justified).
Blockchain-backed digital currencies provide the new world with a way for our economic structure to bypass geopolitical agendas (no matter how just their cause) in a free-market driven manner which economists have been
Bitcoin is up over 20% since Russia first entered Ukraine on February 24
th
, forcing investors to wrestle with the hard truth that fiat currencies are far less safe than we think and that cash under your mattress will do nothing but lose value over time. The 40-year high inflation pace that we’ve reached is causing that uninvested cash to lose value at an accelerating pace. Cryptocurrencies will be a part of our new economy whether you like it or not, and it would be prudent to invest today before their mass adaptation. Bitcoin (
BTC
), Ethereum (
ETH
), and Solana (
SOL
) are the three I would put my money in.
The epic devaluation of the Russian Ruble might eventually help to resolve this geopolitical crisis, but it also shines a light on the fragility of fiat currency. It’s time to get some exposure to cryptocurrencies, and Riot Blockchain
RIOT
is a great place to start.
RIOT is in an advantageous position to capitalize, considering its positioning as the largest bitcoin miner following its recent acquisition of Whinstone US. It controls approximately 12% of the country’s bitcoin mining market and seems to be taking more share every day (management is expecting 20%+ share by the end of 2022). Shares have dropped considerably from their early 2021 highs when meme investors took it to heights past the price of bitcoin itself and now trades at bargain valuation, especially when considering the future potential.
The Oil Trade
WTI crude oil has soared above $115 reaching its highest price levels since the peak of the financial crisis as the threat of energy embargos on Russia drives a boundless bid for this lucrative commodity. With oil and gas operations remaining in NATO’s arsenal of potential headline Russian sanctions, analysts are beginning to believe WTI could reach $125+ a barrel if this invasion persists much longer and these looming restrictions are put in place.
Oil & gas E&P (exploration and production) have been one of the few spaces in this market with a 2022 tailwind in the first 2 months of this year. Energy E&Ps like Occidental
OXY
, Apache
APA
, and Devon Energy
DVN
have seen year-to-date gains of between 30% and 50% (the latter being OXY). They have been some of the most significant beneficiaries of both this inflationary recovery and the escalating energy crisis in Europe, which was just made much worse by Russia’s western opposition. I’m not chasing any energy plays here as I don’t believe this trade has much more room to run.
WTI crude has rallied nearly 50% since the year began, driving the US energy sector’s market value up over 32% in the 2 months since 2022 began (represented by SPDR’s Energy Sector ETF
XLE
), and was the only one of the S&P 500’s 13 sectors that managed to buck the broader market declines with the S&P 500 down over -8% year-to-date.
Nevertheless, this rally in oil will not last forever as its mean reversion is inevitable (as it has been throughout history), and market participants are already positioning for the future of energy within investments in domestic clean energy sectors.
Russia Strike When Oil Prices Are High
Putin’s futile attempts to restore the former Soviet Union appear to have a traceable pattern over the past 2-decades of his rule in Russia. This pattern is centered around his nation’s largest export: oil & gas, which it leverages against the western world.
Europe heavily relies on Russia for its energy supply and has been struggling to meet the burgeoning demand from its economic revival, specifically for natural gas trading at its highest prices on record (while Brent crude touches multiyear highs – most expensive since June 2014).
Now looking back in time, to Russia’s “Annexation of Crimea,” aka, the 2014 invasion of Crimea occurred the last time WTI oil was trading above $100 a barrel. Prior to that, the Russo-Georgian War (also known as the 5-Day War) in August of 2008 took place following the 2008 Financial Crisis, which took WTI crude to a record high of nearly $150/barrel.
Putin’s tactless approach of leveraging its oil reserves (the only source of economic influence Russia has) against the world for his own imperial ambitions didn’t help the country in its prior two attempts to extend Russia’s control, and it doesn’t appear to be working out too well in today’s inexcusable attacks on Ukraine either.
The UN and NATO have plagued the country with economically crushing sanctions and embargos each time Russia’s increasingly authoritarian leader has breached its neighboring countries’ borders. Russia’s stock market has plummeted over 30% since the threat of its onslaught on Ukraine began in mid-February, putting the value of Russia’s Moscow Stock Index (MOEX) -50% below where it was 6 months ago, and the value of the Russian Ruble plunged to its lowest exchange rate in history (<$0.01 US cent per Russian ruble).
Putin does not have the support of his people and, more importantly, Russia’s powerful Oligarchs, who have lost enormous sums of money due to this autocrat’s unfounded incursion into Ukraine. It’s only a matter of time before this invasion comes to an end, with an increasing number of Russian soldiers choosing to surrender instead of fight.
Nevertheless, the energy crisis in Europe is escalating quickly because it relies on Russia, and investors are looking towards sustainable alternatives domestically as the pressures towards clean energy turn from an environmental issue to a financial necessity (sustainable practices are profitable).
Final Thoughts
Russia’s invasion of Ukraine has accelerated nationalization, unveiling a number of ripening long-term investment opportunities.
Market sentiment has soured since 2022 began and strong Q4 earnings weren’t enough to reignite this stock market’s bullish charm as an ostensibly endless stream of fear-spiking headlines hit the wire daily. A fear-fueled market is also one that’s driven by emotion, and when emotions are involved with trading the tendency to oversell/overbuy related securities is a given. Take advantage of this mispricing in this market by being greedy when others are fearful (as Warren Buffett once wisely suggested).
Don’t be overzealous with any all-in plays during this time of elevated volatility (30+ VIX). The key in navigating this choppy trading environment is to slowly scale into your trades each time the market provides you with an ample enough dip.
Like many technical chartists, I use Fibonacci-extension levels for most of my incremental buy targets (price targets to the downside). You can use any number of technical analysis tools such as pivot points for daily targets, RSIs to gauge whether a security is overbought/oversold, or any combination of technical indicators as your buy-in triggers amid this volatility (the more technical signals at each price target the better it holds – two is better than one).
Happy Trading!
Dan
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