As Russia-Ukraine tensions mount, strategists pick the stocks to back and ones to avoid

Published Mon, Jan 31 202210:51 PM ESTUpdated Tue, Feb 1 20221:15 AM EST

Wall Street analysts have picked the areas of the market that they believe will see heightened volatility if tensions between Russia and Ukraine take a turn for the worse. The first month of the year saw heightened volatility in stock markets, and analysts expect this to continue despite a broadly positive economic backdrop. Although Russia has repeatedly denied it is planning an invasion of Ukraine , despite amassing around 100,000 troops and military hardware along the border between the two countries, the U.S. and NATO have refused to take President Vladimir Putin at his word, and instead reinforced strategic positions in the region. Bank of America global emerging market strategists last week suggested that while a further escalation is not a baseline scenario, it is important for markets to factor in, and would likely lead to a "knee-jerk risk-off, with a particular focus on volatility in commodities." A spike in energy and metals prices in Europe would feed into global inflation and potentially weigh on growth, especially in Europe. A draft bill in the U.S. Senate sets forth a range of possible punitive actions in the case of escalation, such as targeted sanctions against Nord Stream 2, Russian banks and energy and mining companies, along with a ban on newly-issued sovereign debt. Bank of America calculates that this could result in $20-30 billion in capital outflows from Russia, weakening the ruble in the short term by 10-15% and forcing 150-200 basis points in Russian interest rate hikes. However, BofA Chief Russia Economist Vladimir Osakovskiy said large macro buffers should keep long-term change to fair values contained, and suggested much of the escalation risk is already priced into markets. Energy spike In a research note last week, Jefferies strategists highlighted that while exposure to Russia, Ukraine and Eastern Europe is low across its stock market coverage, there could be a disproportionate impact on certain global markets if the situation worsens. These included mining, where Russia is a key supplier of nickel, platinum group metals, aluminum, palladium and coal, along with oil and gas, owing to Russia's prominent role in global energy security. Ukraine is also a major global player in wheat and grain, Jefferies noted. "Higher commodity prices could benefit miners such as Glencore , South32 , Rio Tinto whilst higher FCF [free cash flow] for BP , Total and OMV could potentially offset asset-specific risk," Jefferies Equity Research Analyst Raj Jilka summarized. "We see more balanced exposure within Chemicals where PGMs are used as inputs into auto catalyst products, but companies are also secondary refiners of these materials." As the world's largest exporter of natural gas and second-largest exporter of crude oil and petroleum products, Russia supplies around one third of Europe's energy. Bank of America said aluminum, nickel and palladium markets would be particularly threatened given current supply and demand conditions. BofA projects that escalation could drive up oil prices by $5-20 per barrel depending on the severity. The high end of this range could raise headline euro zone CPI (Consumer Price Index) in 2022 by around 1 percentage point and reduce GDP (gross domestic product) by around 50 basis points, which would exert more pressure on the ECB to tighten policy, with CPI expected to remain well above 2% until spring 2023. Stock exposure BofA also named 60 European stocks that could take a short-term hit due to their sales and asset exposure to Russia. The top 10 in descending order were Raiffeisen Bank , TechnipFMC , Coca-Cola HBC (CCH) , Inchcape , Mondi , Carlsberg , Epiroc, Recordati , Danone and Sandvik . Jefferies highlighted a host of stocks with notable exposure to Russia through percentage of sales, profits, remittances or production capacity. These included Bank of Georgia, Renault , Nokian Tyres , CCH , Carslberg, Yandex , Polymetal , Mondi and Danone. Stocks with exposure to Ukraine included CCH, Medicover and Ubisoft , Jefferies highlighted. Several stocks could also attract additional risk premiums, even if their fundamentals remain mostly intact, due to exposure to states surrounding Russia and Ukraine, strategists noted. These include KBC , InPost , Tele2 , Telekom Austria , Heidelberg and Holcim .

Russian service members gather near armored vehicles during drills held by the armed forces of the Southern Military District at the Kadamovsky range in the Rostov region, Russia January 27, 2022.

Sergey Pivovarov | Reuters

Wall Street analysts have picked the areas of the market that they believe will see heightened volatility if tensions between Russia and Ukraine take a turn for the worse.