Here’s How Russian Sanctions Could Impact Your Portfolio

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We learned recently that the U.S. and EU governments plan on imposing sanctions on Russia. While this has been done in a way to try to mitigate the economic backlash, such a backlash is unavoidable, as we are seeing in Thursday’s market action. We should keep in mind that the Russians, in response to the West, could impose some of their own sanctions, and this could have significant market ramifications. With this in mind, it might be wise to reevaluate some of your portfolio holdings in response to what I see as several consequences of these sanctions.

First, sanctions against one country can slow down the entire global economy. In this era of globalization, markets have become more interconnected, and a slowdown in one part of the economy can impact another part, and the slowdown can spread like a communicable disease. It is likely for this reason that we see global stocks decline in sympathy with Russian stocks. Investors might want to consider selling positions that are especially sensitive to the economy. Industrial stocks and consumer discretionary stocks are therefore vulnerable.

Second, Russia is a major producer of some of the world’s most important commodities, and sanctions against the country could lead to export restrictions. Russia is among the top global producers of several commodities, including oil, nickel, palladium, platinum, wheat, and natural gas. Thus, it should come as no surprise that the prices of several of these commodities – oil, palladium, platinum, and wheat — rose strongly on Thursday. Investors might want to take positions in ETFs that track the prices of these commodities, which I list here:

They all have the potential to be beneficiaries, but if you want to pick just one, go with palladium, given that Russia controls about 40 percent of the palladium market. The one to avoid is natural gas, because this is still a highly localized market.