How can an investor protect himself from geopolitical risks?

Geopolitics has again come to the fore in the past few days: the exact dates and times of the alleged invasion of Ukraine by the Russian army have begun to appear in the Western media, and the governments of the United States and European countries are recommending to their citizens. Leave Ukraine. This rhetoric leads to increased volatility in the markets, despite the fact that Russian officials have repeatedly denied the existence of plans for an “invasion”. Vedomosti asked analysts which assets to invest in, shares to be reduced in the portfolio, and which ones to dispose of.

The protective portion of the portfolio should be increased in times of increased volatility, says Gregory Ostrovsky, senior portfolio manager at Sber Asset Management. One of the primary methods of portfolio rebalancing during a period of high volatility is to increase the share of cash in the portfolio until the market situation stabilizes, says Marat Richel, investment advisor at Finam.

During a period of high volatility in the portfolio, it is useful to have a large share of relatively conservative instruments – bonds and stocks of large companies with sufficient liquidity and a wide base of investors, says Kirill Komarov, head of investment analytics at Tinkoff Investments. Such an approach will make it possible not to lose a significant part of the portfolio in the event of a correction, and the liquidity of the instruments will allow the portfolio to be rebalanced without unnecessary costs if, after the correction, the assets that fell into the price appear on the market.

A defensive portfolio should consist of 80% bonds and 20% stocks, says Dmitry Makarov, stock market analyst at SberCIB, while the risky portfolio should include 30% of the defensive part. Personal broker “Opening Investments” Andrei Grebenkin advises, in the stage of pro-inflationary growth, to distribute the assets in the portfolio as follows: 61% of stocks, 30% of bonds, 6% of cash, 3% of alternative investments (gold) . The share of foreign stocks can be 35%, Russian – 26%, foreign currency bonds – 12%, Russian bonds – 18%.

Experts say that even under the most negative scenario of military actions and sanctions, the Russian stock market remains attractive. Gribkin said that Russian commodity companies will start reporting under IFRS, which could be an additional driver of stock growth, as companies are expected to achieve historic record results. He considers Lukoil, the preferred stock in Tatneft and Gazprom Neft to be the most interesting to buy.

Despite the geopolitics, market participants are concerned about inflation, and there is no better way to protect against it than with commodities, says Evgeny Malykhin, Partner, Head of Investments at Aton Management. In the past few months, the Russian stock market has fallen (70% of which is represented by commodity companies) on the back of geopolitical risks. As a result, says the expert, stocks are cheap, despite the fact that the market situation is favorable. And this leads to an increase in the dividend yield of securities, the expert believes: for shares of the leading companies of Lukoil and Gazprom, it may exceed 20%.

Dmitry Makarov, stock market analyst at SberCIB, considers it reasonable to include dividend stocks (MMK, Severstal, Norilsk Nickel, Gazprom, etc.) in the risky part of the hedge portfolio. Such companies generate high cash flow, and dividend yields can be comparable to bonds, so this asset class is better protected from market volatility than common stocks, he explains.

Makarov said risk-averse investors are better suited to a portfolio in which stocks make up 70%. As assets, highly profitable shares of Russian companies (Yandex, Gazprom, X5 Retail Group, Segezha Group), as well as individual securities in foreign markets – microprocessors (Qualcomm, TSMC, Lam Research, Micron Technology) and electric vehicles (in semiconductors, chip technology Micro, GM), Green Energy (Conduction Energy, Enphase Energy, Sunrun).

VTB My Investments investment strategist Stanislav Kleshchev recommends looking at US stocks (BioMarin, AMD, WesternDigital, EastWest Bancorp, Disney, Bristol-Myers Squibb, Zendesk, Dominion Energy, Halliburton, Delta Airlines) and global stocks (Samsung, BNP Paribas, Accor, Lee Otto, Total Energy, Allianz, Novartis, Cellinex).

Grebenkin advises to pay attention to the banking sector, which was sold heavily on the news of upcoming sanctions, primarily on shares of Sberbank and VTB. Also, against the background of the correction in the shares of American technology giants, Yandex and Ozon papers are relevant.

Yulia Melnikova, an analyst at Alfa Capital Management Company, believes that with the VIX fear index up 30%, for a retail investor, exchange-traded funds, whether sectoral or broader, may be the best option for investing in stocks. According to her, due to the high level of diversification, volatility is reduced and there is no risk from an individual issuer.

Investors should watch out for the RSX ETF (the largest US exchange-traded fund that invests in Russian assets), which practically copies the RTSI index, Grebenkin says. You can consider ETF IPAY (invests in payment systems and fintech and follows Prime Mobile Payments Index), ETF AWAY (in off-line and online tourism), ETF SKYY (in technologies and cloud services), and ETF KWEB (in China’s largest IT-companies) , ETF EMQQ (In E-Commerce in Emerging Markets).

Komarov of Tinkoff Investments believes that Russian market ETFs and European equity ETFs now look interesting, are cheaper compared to US stocks and have good potential for recovery.

SberCIB analysts advise paying attention to the ETFs of sunken sectors — cybersecurity, fintech, and green energy, says Makarov. For non-qualified investors, ICLN US Green Energy Equity Fund, US CIBR Cyber ​​Security, and FINX US fintech stocks are available. You can also look at ETFs for individual country markets, for example the FinEx DAX Germany UCITS ETF, which invests in the German market, and the FinEx China UCITS ETF, which targets the Chinese market.

Makarov suggests including short corporate papers in the bond portion of the hedge portfolio. It can be ruble bonds from STLC 001P-04, TMK O-06, AFK Sistema 001P-18 or Eurobonds from Norilsk Nickel (NorNik 23-04), Phosagro (Phosagro 23-04), Sovcomflot (SCF 23 -06), such as As well as OFZ with a floating coupon. To include the protective portion (30%) of the risky portfolio, he recommends the “long” OFZ. Such an asset will receive support when inflation stabilizes, which could soften the rhetoric of the Russian Central Bank.

Komarov agrees, the long OFZs are the first to suffer from geopolitical factors, so it is recommended to buy short bonds or corporate papers, in which the negative reaction is usually reflected less. For an investor who is waiting for a further growth in inflation, versions with a variable coupon (linked to the RUONIA rate, which varies according to the central bank rate): OFZ 29006 or OFZ 29008 are suitable.

Against the background of the decision on the rate (the central bank raised the key rate to 9.5% last week) and geopolitics, OFZ short contracts of up to three years give a return of 10.1%, for maturities of more than 15 years to maturity, a return of 9.75% can be fixed, Grebenkin notes from Open Investments. He is sure that this moment is a unique moment for determining the return in short periods of OFZ, which gives a positive real return at the beginning (inflation is the rate of return of the instrument).

Ostrovsky from Sber Asset Management recommends keeping no more than 10% of the entire portfolio in gold. The same opinion was shared by Kleshchev of VTB My Investments.

In addition to the stabilizing function, since the end of September last year, gold has gradually risen, playing the role of a protective and profitable asset, says Elena Kozukhova, an analyst at Veles Capital. The prospect of Fed monetary policy tightening is putting limited pressure on the metal, which makes sense for holding the medium-term portfolio at prices above $1,750 an ounce (a fixation below may signal a change in trend to the downside). In the event of increased geopolitical tensions, one could consider increasing the share of gold in total investment, says Kozhukova.

In order to stabilize the portfolio, it makes sense to invest in “gold” ETFs that focus on the dynamics of gold prices, while investing in stocks of gold mining companies (either directly or through funds) would be riskier due to the increased volatility of these Origins, notes Kozhukhova. Grebenkin advises using an ETF GLD (actual gold, without profits) or ETF GDX (the largest gold miners) as an element of diversification – in the second case, you can get a bonus in the form of profits.

Ostrovsky recommends using cash to create a financial cushion. According to Komarov, against the background of the current high inflation, the currency should be used in situations only for the purchase of assets whose price has fallen upon correction. The expert believes that holding the currency for the medium and long term is not optimal now.

Grebenkin sees a threat to the portfolio in the presence of shares in the energy sector, distribution networks and utilities. The cost of maintaining the network is increasing, but the increase in tariffs above inflation is regulated by the state. This leads to lower profit margins for companies and less interest from investors, the expert says.

Market prices for oil, steel and some other materials are now nearing a peak or even beginning to fall, Komarov says: The danger could materialize quickly in the event of sharp moves by the US Federal Reserve and at the first sign of inflation easing. . Vasily Karpunin, head of information and analytical content at BCS World of Investments, warns investors against short positions in Russian blue-chips.


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