Impact of Russia’s invasion of Ukraine on the equities landscape

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Russia’s invasion of Ukraine is causing equity traders to abandon some of this year’s most popular strategies and return to old favourites. While initial reaction to the conflict was relatively muted, broader shifts in the outlook for sectors, styles and regions are now getting into gear.

Previously out-of-favour sectors such as defence and renewables have gained fans, while recent big winners like banks have gone into reverse. A shift toward value stocks has lost momentum, with growth suddenly regaining favour, and with it the revival of European stocks has wavered.

Here’s how war in Ukraine is changing the equities landscape:

Europe’s Shine

Buy Europe was a near-unanimous call among global equity strategists at the start of the year. And when Goldman Sachs Group Inc. and Morgan Stanley surveyed their clients in January, they agreed that 2022 would be the time for the perpetually lagging continent to shine.

The trade worked well in January, as expectations of more aggressive tightening by the Federal Reserve hit more expensive U.S. stocks hardest. But with the Ukraine invasion triggering a flight to safety, the scales are now tilting back toward the U.S.

Continental Europe’s equity markets are by far the most vulnerable to Ukraine and rising commodity prices, Credit Suisse Group AG strategists wrote in a note Tuesday, cutting their exposure to the region. Meanwhile, Goldman strategists lowered their target for the Stoxx 600 index, saying some of the weakness associated with the conflict will likely persist.

Tech Malaise

Having been weighed down for months by worries over rising interest rates, tech stocks have reappeared on investor radars. The Nasdaq 100 index briefly flirted with a bear market last week, but has since outperformed, gaining more than 5%.

The shift is tied to expectations that the geopolitical crisis may slow the path of rate hikes, leading to a fall in bond yields. Traders now see little chance of a 50 basis-point rate hike in March by the Fed, a marked change from early February. Meanwhile, European Central Bank rate-hike bets for this year have been put on ice.

The rebound in tech stocks signals a potential reversal of fortunes for their apologists. Cathie Wood’s ARK Innovation ETF has bounced off lows as rate hike bets have cooled. The poster child of hyper-growth names had fallen about 60% from its peak as some members of the ETF had seen a pandemic-induced boom fade.

Playing Defence

Europe’s outperformance at the start of the year was largely due to the abundance of cyclical stocks that benefit from rising rates and a still booming economy. The conflict, however, has given investors and strategists a reason to reassess their assumptions.

Bank stocks in Europe, which were by far the region’s best-performing sector in the first 40 days of the year, have dropped almost 18% in the past three weeks, amid concern over lenders’ exposure to Russia and shifting rate expectations.

Morgan Stanley’s Graham Secker upgraded utilities to overweight on Monday, while downgrading autos to equal weight in a shift to more defensive value. The strategists had only just upgraded telecoms to overweight, another defensive value sector.

Clean Champions

Conventional wisdom dictates that a crisis that triggered a spike in energy prices would favour oil majors, which are set to benefit from the windfall. Instead, the war sparked a rally in renewable energy stocks, after months of dull performance, amid expectations that the standoff will accelerate the transition away from fossil fuels. Green stocks have sharply outperformed oil peers over the past week, with energy majors including BP Plc and Shell Plc suffering a blow from their exposure to Russia, as a wave of sanctions leads them to walk away from their assets in the country.

Source: Financial Express

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