Investing in global markets in the backdrop of the Russia-Ukraine war

Vikas Gupta

Russia’s February 24 invasion of neighbouring Ukraine and sanctions imposed on Moscow by the United States and its allies have triggered concerns about the impact of the conflict on international trade and the global economy.

For perspective, let us take a look at some factual data. With a Gross Domestic Product (GDP) of around $1.7 trillion, Russia is the world’s 11th largest economy.

According to the Observatory of Economic Complexity, a data platform, Russian exports were worth $330 billion and imports $220 billion in 2020. While these look like big numbers, to put them in context, total global trade in 2021 was worth $28.5 trillion. Russian exports are around 1% of global trade and imports are even smaller.

What does Russia trade the most? Crude oil, refined petroleum and petroleum gas make up nearly 50% of its exports. Top destinations are China, the UK, Netherlands, Belarus and Germany. These markets make up nearly 50% of Russian exports.

In terms of international oil trade, the total daily export volume is 65 million barrels, of which Russia accounts for around 12%, or 7.5 million barrels per day. Sure, Russian oil impacts global oil trade. This we have already seen from the significant spike in crude oil prices recently.

The inference from the above data is that other than on crude oil and petroleum, the impact of Russian trade on other markets is minimal. While the war causes uncertainty and disruption in the regular course of business, its impact on the global economy is not significant.

Yes, crude oil prices have second-order effects in terms of inflation and production disruptions. But the direct impact of the war on the global economy is not significant.

Even so, global stock markets are down by around 5%-10% at the headline level from where they were before the eruption of geopolitical tensions and the war in Ukraine.

US market indices, the S&P 500 (large cap), S&P 400 (mid cap) and S&P 600 (small cap) are all down by 5%-6% from the beginning of 2022. The Russell 2000 ( small cap) is down by 8% and Nasdaq-100 by nearly 10%.

European indices CAC 40 (France) and DAX 30 (Germany) are down by 7% and 10%, respectively. The FTSE 100 (UK) is flat. Nikkei (Japan) is down by around 6%.

Market depth and breadth

While it would seem that all these markets present a potential opportunity, one should bear in mind that investors in the US have many more companies to choose from. The S&P 1500 itself has 1,500 companies that are above $850 million in market capitalization at the time of entry into the index. The market depth and breadth in other markets is much lower.

Growth rates

In the long term, the European economy is expected to grow less than 2% while Japan is expected to grow 0.5%. Compared to this, the US economy is expected to grow 4% in the long term. In the next few years, US growth rates are expected to be much higher.

US companies have nearly 50% of their revenue coming from other international markets, which makes their expected revenue growth rate much higher, typically, 6%-7%. Compared to this, European companies are expected to grow much slower.

There are numerous companies in the US markets that are growing 10%-20% or faster. A larger number of companies are growing in high single digits of around 6%-9%.

Valuations

The S&P 500 is available at a forward price-earnings multiple of 20, Russell 2000 at 24 and Nasdaq-100 at 26. This translates to an earnings yield of 5%, 4% and 4%. The earnings yields are much higher than the long-term bond (the 10- year US treasury) yield of 2.5%. Given the inflationary environment, US stocks seem much better placed from an investment perspective.

Coming to growth vectors, the US provides exposure to an interesting matrix, ranging from artificial intelligence, consumer technology, Internet of Things, 5G, Metaverse and Cloud, to healthcare, athleisure, fitness and wellness, Homenesting, E-commerce, payments & fintech, millionaires & luxury, electric vehicles and digital transformation.

The US market offers numerous companies to choose from to create exposure to the above growth vectors. One could choose from several well-known large-cap names and add relatively smaller companies that still have revenue in billions of dollars.

Our recent deep dive into the US markets (S&P 1500 companies) for updating our Omni portfolios revealed numerous companies that are available at significant discounts to their intrinsic values.

We were able to add several growth vectors to the existing portfolios, diversifying the portfolios and adding new growth dimensions while maintaining the expected returns or even enhancing them due to the likelihood of unlocking different vectors earlier.

These are companies with strong, cash-rich balance sheets, well-entrenched business models, high return on capital, significant growth opportunities that are available at discounted prices. Mr. Market is mispricing these companies due to the panic selling in view of Fed rate hikes and the Russia-Ukraine war.

It is likely that the conflict is on the path to stabilization in the next several weeks to months. The US Fed rate hikes will also be digested by Mr. Market in the near future. At that point many of these companies are likely to be repriced closer to their fair values.

For those whose risk profile and asset allocation allows global investing, it is time to take a serious look at the US markets and build a long-term portfolio of diversified growth vectors at cheap prices. Take advantage of Mr. Market’s blind spots!

Disclaimer: Equity investments are subject to market risks. Global investments entail currency and country risks. The above is not a recommendation to buy, sell or hold any of the stocks or sectors mentioned. We, and our clients might have exposure to the above-mentioned stocks or sectors. Please consult your investment advisor and assess suitability of investment products for your circumstances before investing.