Navigating equities as Russia’s invasion continues

If you are a retail investor with 100% equity portfolio you have two choices besides selling it all, which we believe is a bad strategy because timing is a losing strategy:

1. Diversify into other assets in a well-structured way. One solution is to a place X amount (depending on your risk profile) into a well-diversified asset allocation portfolio such as those Saxo offers through SaxoSelect. These portfolios, and especially those with lower risk levels, will diversify outside equities and lower risk for the investor with 100% equity portfolio.
2. If the investor refrains from the above, then the next step is to bolster your 100% equity portfolio in the right way. It is clear from price action and flows, that energy and mining companies (those with little exposure to Russia) are providing good hedges to the current geopolitical risks but also longer term against inflation as it is coming from the supply side of the economy. In addition, themes such as cyber security, logistics, mega caps, and defence are themes that will act well as diversification against growth/technology stocks and overall equity market exposure. Financials would typically be a natural winner during tightening cycles, but the current events make financials high volatility assets with no clear direction as the financial system is being used as key sanctions instrument. We also believe that LNG related assets, air-to-heat pumps and green energy stocks are natural opportunities in the medium-term as the EU will now explore these paths for energy dependence from Russia.

Europe and Germany in historic shift over the weekend

Last week ended with equity markets interpretating the developments as Europe would not inflict too much harm on their economy and there were prospects of peace talks between Ukraine and Russia, but over the weekend things have changed dramatically. Germany has made a historic shift first sending military equipment to a conflict zone for the first time since WWII and on Sunday the Bundestag announced that the country would end its naivete over the past three decades. Germany has announced that it will increase military spending to above 2% of GDP and significantly increase it standing army to the size and importance Germany has in Europe. Other countries might quickly follow the lead of Germany and this will lead to a positive tailwind for Saxo’s defence basket (see basket below) which was also the best performing basket on Friday.

In addition, the EU, the US and UK have decided to exclude a number of Russian banks from SWIFT, which is a messaging system for rapid transfers in the international financial system, which will make trade with Russia much more difficult. The energy and resource sectors are still left out of the sanctions which are around 50% of Russia’s national income, but this could come into play in the event Kyiv is taken by Russian forces. The sanctions on banks have hit Russian banks hard today and the ECB said that it expected Sberbank’s subsidies in Europe to fail today or tomorrow. Switzerland has also just announced that it will adopt the EU sanctions on Russia which is increasing the pain for Russian businesspeople as the country was seen as neutral and a key hotspot for Russian offshore wealth. European financials are the biggest loser today down 4% and the list below shows clearly which banks have the highest exposure to Russia and thus which one investors that want to limit Russian exposure should avoid. It also clear from BIS data that Italy, France and Austria are the most vulnerable to Russia sanctions through the banking system.

Europe’s energy sector enters new paradigm

Over the weekend, the UK energy company BP announced that it will exit its 20% stake in Rosneft, Russia’s largest oil company, potentially taking a loss of $25bn putting pressure on other European companies to decide what to do with their Russian assets. The Norwegian Wealth Fund also announced over the weekend that it plans to exit all its Russian assets and Equinor followed up on BP saying it will divest all of its JVs in Russia. To defend the RUB and Russian stocks, the Russian central bank hiked interest rates to 20% on Monday and halted trading in Russian equities in Moscow. The decisions by European energy companies are negatively impacting these companies despite higher oil and gas prices, and we should emphasise that these energy assets are still to be regarded as hedging assets as we wrote last week, but the key filter is on the Russian exposure.

Inside the energy developments the invasion of Ukraine has caused Europe’s green energy stocks to surge dramatically higher with Orsted (offshore wind farm developer) and Vestas shares to jump 28% and 35% respectively since the day before the invasion. The green transformation trade was looking very ugly due to inflationary pressures impacting gross margins of green energy assets but also rising interest rates impacting the lofty equity valuation. But Europe’s desire to become independent of Russia will accelerate plans for green energy and we expect strong government funding flowing in this direction over the coming years or decade and we expect the EU to prioritize domestic manufacturers over cheaper Chinese manufacturers.

Europe’s energy ministers have met today to discuss how Europe can become energy independent from Russia and these discussions will likely continue in the medium-term. In the short-term there are no real quick fixes except from limiting transportation (work-from-home is one mitigation strategy as 50% of oil consumption in the EU is for road transportation). Medium-term strategy is likely including potential gas and oil deals with North African countries, Iran or Venezuela, besides accelerating the green energy share of total energy production on top of more LNG capacity (Germany has decided to build two new LNG terminals as quickly as possible) and air-to-heat pumps replacing gas as the heating source; however, the next dilemma is what energy source we use for electricity production.

The list below shows some companies with exposure to LNG.

• Sempra Energy
• Cheniere Energy
• Flex LNG
• Golar LNG
• Awilco
• NextDecade
• Teekay

The list below shows companies with exposure to air-to-heat pumps.

• Mitsubishi Electric
• Daikin Industries
• Carrier Global
• Johnson Controls
• Nibe Industrier

Companies with Russian exposure

ESG is a popular investment among investors and the invasion of Ukraine means that ESG is likely to expand to include geopolitical risks such as conflict zone assets of the aggressor. In this case Russian assets will get the status of being non-ESG compliant for many portfolios and BP’s decision over the weekend will put enormous morally pressure on other European companies to decide what to do with their Russian assets. The list highlights some key companies with significant business exposure to Russia (others could have exposure through assets besides revenue).

• Polymetal International
• Evraz
• Uniper
• Forum
• Raiffesen Bank International
• Carlsberg
• Neste
• Rockwool
• Renault
• Danone
• Sandvik