Conflict playbook: How investors can protect their portfolios if Russia were to invade Ukraine

Published Fri, Feb 11 20224:06 PM ESTUpdated Fri, Feb 11 20229:55 PM EST

Stocks suffered a late-day slump Friday , as investors reacted to headlines regarding the escalating tensions between Russia and Ukraine, which ultimately spurred a rally in the oil market. For investors looking to protect their portfolios from the potential conflict, CNBC Pro dug into the Wall Street research and found equities to avoid — and some that could get a lift — if Russia invades Ukraine. Russia and Ukraine have been embroiled in a conflict since 2021, when Russia started building up its military presence at various points along the Ukrainian border. On Friday, U.S. oil prices rose more than 5% as U.S. National Security Advisor Jake Sullivan said at a White House briefing that there were signs of Russian escalation at the Ukraine border. He also said that it was possible that an invasion could take place during the Olympics, despite speculation to the contrary. Sullivan noted that the U.S. is not certain that Russian President Vladimir Putin has made a final decision to invade Ukraine. But "it may well happen soon," he said. "The Russia/Ukraine news delivered another body-blow to markets, which were already reeling from stubborn inflation numbers and uber hawkish comments from Fed officials," Cornerstone Wealth chief investment officer Cliff Hodge said. "We may have more downside risk over the coming weeks as markets react to headlines, but investors should put together their shopping list, as there are some interesting opportunities to begin to pick through the wreckage," Hodge added. The Dow Jones Industrial Average dropped 503 points, while the S & P 500 fell 1.9%. The Nasdaq Composite dropped 2.8%. The VanEck Russia ETF (RSX) dropped more than 7%. The ETF is made up of energy companies like Lukoil as well as state-owned bank Sberbank Russia. Bucking the broader market's trend were energy stocks, which rose alongside oil prices. Defense stocks also moved higher on Friday afternoon. Major banks in recent weeks have been preparing clients for a possible Russia invasion of Ukraine. Here's a summary of their recommendations. Morgan Stanley Defense and government services stocks could get a lift from the Ukraine-Russia tensions, Morgan Stanley said in a note Saturday. "If the market starts pricing in the geopolitical risks related to Russia-Ukraine, we would expect a rising tide to lift all boats," Morgan Stanley's Kristine Liwag said. The firm highlighted defense stocks with an overweight rating: Lockheed Martin , Northrop Grumman and Raytheon Technologies. On the government front, Morgan Stanley gives Booz Allen Hamilton , Science Applications International and Maxar Technologies are rate overweight by Morgan Stanley. Bank of America Foreign military sales into Europe, particularly countries close to Russia, could rise given the current situation, according to Bank of America. Because of this, shares of General Dynamics , Raytheon , Lockheed Martin and Northrop Grumman could get a boost, Bank of America said. The bank noted that these companies are military equipment makers that could may see more interest from countries like Poland, Romania and Germany. Defensive cybersecurity providers like Booz Allen Hamilton and ManTech may also rise, the firm said. "Russia is known to have and deploy advanced cyber capabilities," BofA's Ronald Epstein said. The iShares U.S. Aerospace & Defense ETF (ITA) contains a lot of the defense stocks these banks are bullish on in case of a conflict. Cowen Russia's role in global energy could impact markets, Cowen warned. Energy stocks with exposure to Russia include BP , Valero Energy and Schlumberger , the firm said. Other shares could have relative upside if supply disruptions occur: Coterra Energy , EQT and Cheniere Energy . Canaccord F-35 aircrafts could be in high demand is war breaks out in Europe, said Canaccord, meaning that investors in Mercury Systems should keep an eye on NATO countries. Mercury supplies some parts of the F-35 to Lockheed Martin, which makes the aircraft. Evercore ISI Certain liquified natural gas stocks could rally if the global gas balance tightens even more, Evercore ISI said. Cheniere Energy, Golar LNG , Tellurian and NextDecade are potential beneficiaries highlighted by the firm. European stocks Wall Street agrees that the Russia invasion could weigh the hardest on European stocks. Last month, Bank of America global emerging market strategists said increased Russia-Ukraine tensions 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 , the firm said. BofA also named 60 European stocks that could take a short-term hit due to their sales and asset exposure to Russia. Raiffeisen Bank , TechnipFMC , Coca-Cola HBC (CCH) , Inchcape , Mondi , Carlsberg , Epiroc, Recordati , Danone and Sandvik were some of the top names. 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. — with reporting from CNBC's Michael Bloom and Elliott Smith.

Russian President Vladimir Putin speaks during a news conference following talks with Hungarian Prime Minister Viktor Orban in Moscow, Russia February 1, 2022.

Yuri Kochetkov | Reuters

Stocks suffered a late-day slump Friday, as investors reacted to headlines regarding the escalating tensions between Russia and Ukraine, which ultimately spurred a rally in the oil market.

For investors looking to protect their portfolios from the potential conflict, CNBC Pro dug into the Wall Street research and found equities to avoid — and some that could get a lift — if Russia invades Ukraine.