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:

  • Oil: United States Oil Fund LP (NYSEArca:USO)
  • Nickel: iPath Nickel ETN (NYSEArca:JJN)
  • Palladium: ETFs Physical Palladium Shares (NYSEArca:PALL)
  • Platinum: ETFs Physical Platinum Shares (NASDAQ:PLTM)
  • Wheat: Teucrium Wheat Fund (NYSEArca:WEAT)
  • Natural Gas: iPath Natural Gas ETF (NYSEArca:GAZ)

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.

Investors should also consider owning shares in companies that will benefit from increases in these commodities, although perhaps more importantly investors should avoid companies that will suffer as these commodities’ prices rise. A rising oil price hurts virtually every company, but airlines and trucking companies will get hit especially hard. Platinum and palladium are essential materials in catalytic converters that go into cars. While these are relatively small input costs for car manufacturers, investors should be aware that these are very tiny markets, and a supply shock in a very tiny market can create a price increase of several multiples. I would avoid automobile manufacturers for the time being.

Third, while we all want to avoid war, historical evidence leads me to the observation that economic sanctions, or to put the term more bluntly, “economic warfare,” precedes war. The potential for war means that you need to have shares of defense contractors on your radar. These companies are actually relatively cheap, because they haven’t grown over the past couple of years. Investors should also consider owning commodities that will be in demand during a time of war. Base metals such as copper and zinc come to mind. You can buy the Powershares DB Base Metals ETF (NYSEARCA:DBB), which has actually risen 10 percent in just the past month.

Finally economic sanctions lead to economic uncertainty, and this leads people to buy gold. So I would consider buying some gold, and the best way to do so using an ETF is through the Sprott Physical Gold ETF (NYSEARCA:PHYS), which has a tax advantage over the more popular gold fund the SPDR Gold Trust (NYSEARCA:GLD).

Ultimately, economic sanctions will probably not end well. They have the potential to have a serious impact on unintended targets. With this in mind, you should keep on your toes and consider putting on some of the trades I mention in this article.

Disclosure: Ben Kramer-Miller has no position in the stocks or ETFs mentioned in this article.

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